Cross-Border Mergers: EU Perspectives and National Experiences [1st ed. 2019] 978-3-030-22752-4, 978-3-030-22753-1

Table of contents :
Front Matter ....Pages i-xxv
Front Matter ....Pages 1-1
Reviewing the Implementation of the Cross-Border Mergers Directive (Thomas Papadopoulos)....Pages 3-34
An Empirical Research on Cross-Border Mergers at EU Level (Thomas Biermeyer, Marcus Meyer)....Pages 35-51
Cross-Border Mergers and Reincorporations in the EU: An Essay on the Uncertain Features of Companies’ Mobility (Federico M. Mucciarelli)....Pages 53-64
Appraisal Rights in the US and the EU (Alexandros Seretakis)....Pages 65-80
Shareholders’ Derivative Suits Against Corporate Directors, Following Cross-Border Mergers: A Functioning Remedy Within the EU? (Georgios Zouridakis)....Pages 81-99
Front Matter ....Pages 101-101
Disclosure of Inside Information in Cross-Border Mergers (Vassilios D. Tountopoulos)....Pages 103-129
Cross-Border Mergers and Cross-Border Takeovers Compared (Matteo Gargantini)....Pages 131-158
The Relationship Between Article 4(1)(b) of the Cross-Border Merger Directive and the European Merger Regulation (Marco Corradi, Julian Nowag)....Pages 159-174
Unions’ Freedom to Establish and Provide Services (Ewan McGaughey)....Pages 175-191
Tax Mergers Directive: Basic Conceptualisation (Georgios Matsos)....Pages 193-208
Procedural Harmonisation in Cross-Border Mergers (Michael Kyriakides, Fryni Fournari)....Pages 209-222
Front Matter ....Pages 223-223
Experiences from the Implementation of the Cross-Border Mergers Directive in Austria (Georg Gutfleisch)....Pages 225-244
Experiences from the Implementation of the Cross-Border Mergers Directive in Cyprus (Thomas Papadopoulos)....Pages 245-274
Cross-Border Mergers: The Danish Experience (Hanne S. Birkmose)....Pages 275-293
Cross-Border Mergers in France (Bénédicte François)....Pages 295-324
The Implementation of the Cross-Border Mergers Directive (2005/56/EC) in Germany: A Story of Insufficiencies and (Better) Alternatives (Sebastian Mock)....Pages 325-341
Experiences from the Implementation of the Cross-Border Mergers Directive in Greece (Thomas Papadopoulos)....Pages 343-377
The Implementation of the Cross-Border Mergers Directive in Italy: An Overview with a Critical Assessment of Dissenting Shareholders’ Appraisal (Sergio Gilotta)....Pages 379-399
The Implementation of the Cross-Border Mergers Directive in Luxembourg (Isabelle Corbisier)....Pages 401-409
Implementation of the Cross-Border Merger Directive in the Netherlands (M. A. Verbrugh)....Pages 411-424
Cross-Border Mergers: Experiences from Poland (Ariel Mucha, Arkadiusz Radwan)....Pages 425-441
The Mutual Influence Between Cross-Border Merger and Common Merger Regimes in Spanish Law (Alfonso Martínez-Echevarría)....Pages 443-475
Cross-Border Mergers Directive and Its Impact in the UK (Jonathan Mukwiri)....Pages 477-503

Citation preview

Studies in European Economic Law and Regulation 17

Thomas  Papadopoulos Editor

Cross-Border Mergers EU Perspectives and National Experiences

Studies in European Economic Law and Regulation Volume 17

Series Editors Kai Purnhagen Law and Governance Group, Wageningen University Wageningen, The Netherlands Josephine van Zeben Worcester College, University of Oxford Oxford, United Kingdom Editorial Board Members Alberto Alemanno, HEC Paris, Paris, France Mads Andenaes, University of Oslo, Oslo, Norway Stefania Baroncelli, University of Bozen, Bozen, Italy Franziska Boehm, Karlsruhe Institute of Technology, Karlsruhe, Germany Anu Bradford, Columbia Law School, New York, USA Jan Dalhuisen, King’s College London, London, UK Michael Faure, Maastricht University, Maastricht, The Netherlands Jens-Uwe Franck, Mannheim University, Mannheim, Germany Geneviève Helleringer, University of Oxford, Oxford, UK Christopher Hodges, University of Oxford, Oxford, UK Lars Hornuf, University of Bremen, Bremen, Germany Moritz Jesse, Leiden University, Leiden, The Netherlands Marco Loos, University of Amsterdam, Amsterdam, The Netherlands Petros Mavroidis, Columbia Law School, New York, USA Hans Micklitz, European University Institute, Florence, Italy Giorgio Monti, European University Institute, Florence, Italy Florian Möslein, Philipps-University of Marburg, Marburg, Germany Dennis Patterson, Rutgers University, Camden, USA Wolf-Georg Ringe, University of Hamburg, Hamburg, Germany Jules Stuyck, Katholieke Universiteit Leuven, Leuven, Belgium Bart van Vooren, University of Copenhagen, Copenhagen, Denmark

This series is devoted to the analysis of European Economic Law. The series’ scope covers a broad range of topics within economics law including, but not limited to, the relationship between EU law and WTO law; free movement under EU law and its impact on fundamental rights; antitrust law; trade law; unfair competition law; financial market law; consumer law; food law; and health law. These subjects are approached both from doctrinal and interdisciplinary perspectives. The series accepts monographs focusing on a specific topic, as well as edited collections of articles covering a specific theme or collections of articles. All contributions are subject to rigorous double-blind peer-review.

More information about this series at http://www.springer.com/series/11710

Thomas Papadopoulos Editor

Cross-Border Mergers EU Perspectives and National Experiences

Editor Thomas Papadopoulos Department of Law University of Cyprus Nicosia, Cyprus

ISSN 2214-2037 ISSN 2214-2045 (electronic) Studies in European Economic Law and Regulation ISBN 978-3-030-22752-4 ISBN 978-3-030-22753-1 (eBook) https://doi.org/10.1007/978-3-030-22753-1 © Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

For my parents, Grigorios and Evdokia, and my brother, Grigorios-Zois. It will now be much easier for Europe’s companies to cooperate and restructure themselves across borders. This will make Europe more competitive and enable businesses further to reap the benefits of the Single Market. The Cross-border Mergers Directive opens new ground. It is a major step in favour of EU businesses, which have been calling for the adoption of this text for many years. This is true, in particular, of those mid-sized businesses which are active in more than one Member State, yet too small to form European Companies. With this Directive, companies will be able to organise themselves and develop efficiencies on a cross-border basis, and further reap the benefits of the Single Market. Statements of Charlie McCreevy, European Commissioner for Internal Market and Services (2004–2010), about the adoption of the Cross-Border Mergers Directive. Brussels, 29 November 2005 and 10 May 2005 (Press releases, IP/05/1487 and IP/05/551).

Foreword

The 10th EU Directive on Cross-Border Mergers (“CBM Directive”) has been in effect for more than 10 years now. When it first entered into force, back in 2007, it inspired the Centre for European Company Law (CECL), where I am the Coordinating Director, to devote a conference to this matter in Utrecht, the Netherlands.1 In 2016, my good friend Dr. Thomas Papadopoulos conceived the brilliant idea of hosting a conference to celebrate the second lustrum of the CBM Directive and to see where we currently stand as regards cross-border mobility of companies in Europe. That conference was organized by the Department of Law of the University of Cyprus and took place in that University’s impressive new Amphitheatre on 7 October 2017. I had the honour of delivering the keynote address to the conference.2 The conference was attended by numerous students, practicing lawyers and academics from different countries and generated a lively debate on the various aspects—advantages and disadvantages, benefits as well as shortcomings—of the CBM Directive in its current form. The debate was driven by speakers from several different EU Member States, who highlighted the different ways in which the Directive has been transposed and implemented in their respective home countries. Their lectures have now been elaborated, updated and transformed into contributions that make up the greater part of this book: the reader will find contributions from Austria (Georg Gutfleisch), Cyprus (Thomas Papadopoulos), Denmark (Hanne Søndergaard Birkmose), France (Bénédicte François), Germany (Sebastian Mock), Greece (Thomas Papadopoulos), Italy (Sergio Gilotta), Luxembourg (Isabelle Corbisier), the Netherlands (Maarten A. Verbrugh), Poland (Arkadiusz Radwan

1

The report on the conference can be downloaded from www.cecl.eu. The speech can be seen and heard at https://www.youtube.com/watch?v¼6mYvabn1itw and was published in ECL, December 2017, Volume 14, Issue 6, p. 214–217, under the title 10 Years CrossBorder Mergers Directive: Some Observations About EU Border Protection and Minority Exit Rights.

2

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and Ariel Mucha), Spain (Alfonso Martinez-Echevarria) and the UK (Jonathan Mukwiri). The conference also dealt with some specific, not country-related, aspects of the CBM Directive, however, which are of course reflected in this bundle’s content. This part adopts an EU and comparative perspective. Thomas Papadopoulos gives an EU and comparative law overview of the CBM Directive’s transposition, with a critical evaluation. The study by Thomas Biermeyer and Marcus Meyer presents an important source of empirical data concerning cross-border mergers for the years 2013 through 2017, as a follow-up to the “Bech-Bruun Report” from 2013. Federico Mucciarelli evaluates the various reasons companies may have for re-registering in another country (either within the EU or elsewhere) and the methods that are currently at their disposal for giving shape to such plans. Alexandros Seretakis takes a closer look at minority shareholders involved in cross-border mergers, comparing the appraisal rights available under EU and US corporate law. Georgios Zouridakis advocates the EU-wide introduction of a US-style instrument of derivative suits against corporate directors following harmful cross-border mergers. Last but not least, the book contains internal comparative law exposés relating to the CBM Directive, in the context of various areas of law, by Marco Corradi and Julian Nowag (competition law), Ewan McGaughey (labour law and the position of the unions), Georgios Matsos (tax law), Michalis Kyriakides and Fryni Fournari (procedural law), Vassilios Tountopoulos (capital markets law and inside information) and Matteo Gargantini (capital markets law and takeovers). The various exposés in this book are interesting not only for academics but also for practicing lawyers confronted with the different national and international law aspects of a commercial cross-border transaction: this book will certainly sharpen their “antennas” for determining what is relevant to their client’s position and whether or not they need to engage outside expertise, either local or foreign. As a final remark, I would like to note that a cross-border merger implies a fundamental change in legal environment for the shareholders. This not only applies to corporate governance but also extends to legal disputes and corporate litigation, relationships with workers’ unions and other employee representatives where applicable, the rules for challenging corporate resolutions, the role of notaries and other officials in corporate relationships, etc. However, the current CBM Directive does not prescribe exit compensation as a mandatory provision to protect minority shareholders (Article 4(2)).3 As a consequence, some Member States provide for such a shareholder safeguard, while others do not. I am pleased to see that the European legislature has recognized the legal uncertainty that this brings as a major obstacle to cross-border mergers. The recent proposal for a Directive on cross-border conversions, mergers and divisions contains an exit right for minority shareholders in the form of a cash payment ultimately determined by a court-appointed independent expert.4 The same protection is

3 Cf. Marieke Wyckaert & Koen Geens, Cross-Border Mergers and Minority Protection: an OpenEnded harmonization, ECL December 2008, Volume 5, Issue 6, p. 295. 4 COM(2018) 239 final, Article 126a.

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prescribed if and when another form of corporate restructuring or transformation applies, such as a cross-border conversion or a cross-border division. Hopefully, at least that particular element of this rather ambitious proposal will soon come into force. For further reading about this proposal, I gladly refer to Thomas Papadopoulos’s EU and comparative law chapter in this book. Leiden University, Law Faculty, Leiden, The Netherlands

Steef M. Bartman

Preface

The aim of this edited book is to analyse various aspects of the Cross-Border Mergers Directive (hereinafter, “CBMD”). The general objective is to scrutinize this harmonized area of EU company law. More specifically, this edited book aims at providing a comprehensive analysis of the CBMD. The goal is to critically evaluate cross-border mergers as a method of corporate restructuring (i.e. mergers and acquisitions (M&As)). The analysis takes place in the context of European, comparative and national company law, while other areas of law are also considered carefully. Special emphasis is given on the implications on the internal market. Furthermore, some national company laws implementing the CBMD are analysed. With this approach, this edited book fills an important gap in the research of European company law. It covers EU harmonization of cross-border mergers in a comprehensive and practical way, and links it with the discussion of corporate restructuring in general, while also taking the implementation of the directive into account. This edited book examines the CBMD and its impact on EU corporate restructuring. It analyses the effects of the CBMD on the internal market and on national company laws. This approach assists us in identifying the advantages and disadvantages of these regulations and in proposing possible amendments. After reviewing the CBMD, the contributions identify the advantages and the disadvantages of this directive. Deficiencies, gaps and inconsistencies are recognized. After a careful analysis of these deficiencies, certain suggestions for possible amendment and amelioration of the CBMD and national laws implementing it are provided. The Research Promotion Foundation of the Republic of Cyprus financed a research project on the regulation of takeovers and mergers at EU and national level (Research Project: “Takeovers and Mergers in European, Cypriot and Greek Company Law” KOULTOURA//ΒΡ-ΝΕ/0514/18, July 2015–December 2017). I was the project coordinator of this research project. The host organization was the University of Cyprus. This research project accompanied the “Cyprus Research Award – Young Researcher (2014)” of the Research Promotion Foundation of the Republic of Cyprus (category of “Social Sciences and Humanities”), which I was awarded in December 2014. This distinction was awarded on the basis of xi

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my research on takeovers and mergers and was accompanied by funding for this research project. In the context of this research project, I organized an international conference on the CBMD with the title “Cross-Border Mergers Directive: EU Perspectives and National Experiences”. This conference aimed at scrutinizing the structure, the function and the implementation of the 10th Company Law Directive on Cross-Border Mergers (Directive 2005/56/EC-CBMD), a relatively underexplored topic of European Company Law. The speakers from all over Europe discussed various aspects of the regulation of cross-border mergers. Notably, this conference’s goal was to critically evaluate the contribution of this harmonizing instrument to corporate restructuring in the context of M&As. Apart from some company law papers discussing the general aspects of the CBMD, there were also papers discussing the relationship of the CBMD with other areas of law, such as tax law, employment law, competition law, civil procedure, private international law, financial law and capital markets law. There were also papers discussing the implementation of the directive in national company laws of some Member States. The conference took place on Saturday, 7 October 2017, at the premises of the University of Cyprus. The conference was financed by the Republic of Cyprus through the Research Promotion Foundation in the context of the research project mentioned above. The final conference programme is available at the research programme’s website: http://www.ucy.ac.cy/takeovers-mergers/conference. The Keynote Speaker of this international conference was Professor Steef Bartman, Professor of Company Law at the University of Leiden in the Netherlands; Attorney-at-Law at Bartman Company Law in the Netherlands; Co-managing Director of the Centre for European Company Law (CECL) and Editor-in-Chief of the European Company Law (ECL) journal, published by Kluwer. All presentations scrutinized specific angles of the CBMD in the light of European, comparative and national company law, while the CBMD was put in context of other areas of law. I would like to congratulate all the speakers on their excellent, original and well-founded presentations. Their presentations shed light on various intricacies deriving from the CBMD. The attendance of this conference was impressive. More than 180 persons attended the conference. Numerous persons with various backgrounds (academics, lawyers, practitioners, economists, accountants, government officials and policy-makers, officers of supervisory authorities, social partners, doctoral researchers, postgraduate and undergraduate students, etc.) from Cyprus and from all over Europe attended this conference. Some of them came to Cyprus only for this conference (from Germany, the Netherlands, Italy, UK, Ukraine, Greece, etc.). The enriched conference proceedings are published in this edited book. This book does not include only the conference papers, but it is enriched with additional contributions from other academics, who did not participate in the conference. The title of this edited book is: Cross-Border Mergers: EU Perspectives and National Experiences. This edited book is part of Springer’s book series “Studies in European Economic Law and Regulation”. The Series Editors are Prof. Kai Purnhagen and Dr. Josephine van Zeben.

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This edited book is divided into three parts. The various contributions allocated among these three pillars provide a comprehensive analysis of a specific piece of secondary EU law, the CBMD. The first pillar focuses on EU and comparative perspectives on the CBMD, the second pillar examines the CBMD in the context of various areas of law, and the third pillar scrutinizes national experiences from the implementation of the directive in some Member States. The first part scrutinizes the various provisions, as well as the impact of the CBMD. More specifically, it reviews the structure and the functioning of the CBMD in the internal market. Various aspects of the CBMD, such as a critical review of its implementation, empirical findings, reincorporations, comparison of appraisal rights between the US and the EU and shareholders’ derivative suits, are scrutinized. All these chapters evaluate critically the main features of the CBMD and the experience so far from its performance in the internal market. The advantages and the disadvantages of this directive are scrutinized, and proposals for reform are submitted. The “Study on the Application of the Cross-Border Mergers Directive” prepared by Bech-Bruun and Lexidale for the European Commission and other studies scrutinizing the implementation of the CBMD are examined. National and CJEU’s case law is also taken into account. The first part of this edited book provides a wider understanding of the impact of the CBMD on European and national company law. The second part of this book is dedicated to an analysis in the context of various areas of law, such as capital markets law, financial law, competition law, employment law, tax law and procedural law. The approach of the second part would assist us in understanding better the business environment for cross-border mergers and their interaction with various other areas of law. This volume adopts a wider approach towards cross-border mergers by examining this company law directive in the framework of other areas of law. This combined approach provides a better comprehension of cross-border mergers. The dynamics of cross-border mergers go beyond company law and fall within the scope of other areas of law. Cross-border mergers are instruments with wide repercussions on various areas of law. The second part of the edited book proves that an overarching approach to all areas of law regulating cross-border mergers is essential for the complete understanding of the cross-border mergers mechanism. The CBMD seeks to establish a pan-European market for M&As by adopting harmonized company law rules for cross-border mergers. However, the European legislature considers cross-border mergers not only in the light of company law but also in the light of other areas of law. As a result, a good grasp of the regulation of cross-border mergers by other areas of law is also essential. Finally, the third part of this edited book focuses on the transposition of the CBMD in various Member States. The implementation of this directive in national company laws is analysed in various chapters. The reader has the chance to get acquainted with some aspects of the transposition of the CBMD in certain Member States. Through the findings of these chapters, it is highlighted how well and successfully these harmonized rules apply to various Member States. The analysis of national laws transposing the CBMD and a commentary on the relevant national case law also take place. The multi-level regulatory system of the CBMD requires an

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examination of the implementation of the CBMD in various Member States. CBMD provides procedural rules for carrying out a cross-border merger. However, the harmonization of this procedure is not comprehensive, as reference is made to national company law for several aspects of the procedure. Certain procedural aspects of cross-border mergers are not harmonized by the CBMD, and the relevant national rules apply and cover this gap. This results in a multi-level regulatory regime, where certain procedural aspects of cross-border mergers are regulated by the CBMD and other by the national company law. The applicable national company law includes also the transposed provisions of the Third Company Law Directive on Domestic Mergers. Although this multi-level regulatory regime adjusts the CBMD to the requirements of the national company law, it leads to legal diversity and results in lack of legal certainty. The edited book Cross-Border Mergers: EU Perspectives and National Experiences focuses on specific but crucially important structural measures fostering corporate change, namely, cross-border mergers. Such cross-border transactions play an important role in business reality, in economic theory and in corporate and capital markets law. After the adoption of the CBMD, cross-border mergers are regulated by specific legal provisions in EU Member States, which facilitate this corporate restructuring mechanism by seeking to establish a pan-European market for cross-border mergers. It is therefore necessary to examine the legal framework of such transactions in order to generate valuable insights about their fundamental mechanisms. Likewise, this approach reveals new challenges not only for traditional company law but also for other areas of law, such as capital markets law, financial law, competition law, employment law, procedural law and tax law. The findings of this edited book become of greater importance in the light of the future revision of this directive. This collection of papers reveals the advantages and disadvantages of the CBMD as an instrument of corporate restructuring. Some very useful conclusions are inferred from the various book chapters. Undoubtedly, this collection of papers contributes to the relevant debate and opens the floor for further discussion and research on these topics. EU company law is a very interesting area of law for academics, practitioners, officers and researchers. Company law has been at the centre of interest in EU law since the early stages of European integration. The internal market required among other things the harmonization of the rules relating to company law, as well as to accounting, auditing and securities regulation. EU company law is an area of law, which does not concern only lawyers; economists, accountants, financial controllers, bankers, officers of stock exchanges and employees of consulting and investment companies are also interested in this area of law. Apart from EU company law, this edited book is also related to capital markets law, financial law, competition law, employment law, tax law, procedural law and internal market law. This edited book would be beneficial for the relevant EU and domestic institutions and actors. By getting hold of the results, a better and more thorough understanding of this directive is offered. This edited book would be particularly interesting for academics and lawyers from various Member States who could analyse the regulatory directions that their Member States had followed and could

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discuss how these national decisions interact with the internal market. Interested parties would not specialize only in EU law and company law. Academics and practitioners specializing in EU law, company law, corporate finance, capital markets law, financial law, tax law, employment law, contract law, procedural law, competition law and European economic law, managers and investors in European undertakings as well as EU\national regulators and officers would be interested in these aspects of the CBMD. This edited book would be interesting for all Member States of the European Union, as well as for the EFTA Member States, which comply with the EU harmonization of company law (Switzerland, Norway, Liechtenstein, Iceland). This edited book would also be a valuable reference for lawyers from non-EU countries who want to find answers to their questions on EU company law matters related to the regulation of cross-border mergers. Nicosia, Cyprus June 2018

Thomas Papadopoulos

Acknowledgements

I would like to thank various persons who provided valuable support, assistance and encouragement for the preparation and publication of this edited book and for the organization and realization of the conference. I would like to thank the Research Promotion Foundation of the Republic of Cyprus, who sponsored very generously this academic event, in the context of the research project: “Takeovers and Mergers in European, Cypriot and Greek Company Law” (KOULTOURA//ΒΡ-ΝΕ/0514/18). I am indebted to all persons who accepted to contribute to the edited volume. I would like to thank them for their hard work and to acknowledge their continuous support to this publishing effort, without which, the completion of this edited book would be impossible. I appreciate their devotion to the success of this project. I would also like to express my gratitude to my colleagues at the Law Department of the University of Cyprus for their continuous support and trust from the first day I joined the University of Cyprus. A special word of thanks to the Keynote Speaker of this international conference, Professor Steef Bartman, who also accepted to write the foreword of this edited book. I would like to thank the Rector of the University of Cyprus; the Registrar of Companies of the Republic of Cyprus; the Law Department’s Secretary, Chryso Karakosta; the Head of the Communication Office of the University of Cyprus, Katerina Nikolaidou; and my current and former volunteer students, whose help for the organization of the conference was invaluable. Furthermore, I would like to thank the four research assistants who were employed and worked at the research project as special scientists in order to assist me in my research (Louiza Kofina, Kallistheni Kountouri, Juliana Georgallidou and Athina Patera). I would also like to express my gratitude to all those persons who attended the conference and expressed their interest in this research. I am also grateful to my colleagues from the Centre for European Company Law (CECL) and from the European Company Law (ECL) journal, of which I am one of its editorial secretaries. Additionally, I would like to thank the Series Editors of “Studies in European Economic Law and Regulation”, Prof. Kai Purnhagen and Dr. Josephine van Zeben, who accepted to include this book in this book series. Moreover, I would like to thank the employees of Springer, and especially Dr. Anja Trautmann LL.M. (Editor), for their excellent cooperation during the publishing process of this book. xvii

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I would like to acknowledge the gratitude that I owe to my family, who helped and supported me during the editing of this book and the preparation of the conference. I would like to thank my father, Grigorios; my mother, Evdokia; my grandmother, Vivi; my grandmother, Zoi; my brother, Zois; and the rest of my family, without whose love, encouragement, respect and support, this edited volume would not have been possible.

Contents

Part I

Cross-Border Mergers: EU and Comparative Perspectives

Reviewing the Implementation of the Cross-Border Mergers Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thomas Papadopoulos An Empirical Research on Cross-Border Mergers at EU Level . . . . . . . Thomas Biermeyer and Marcus Meyer Cross-Border Mergers and Reincorporations in the EU: An Essay on the Uncertain Features of Companies’ Mobility . . . . . . . . . . . . . . . . . Federico M. Mucciarelli Appraisal Rights in the US and the EU . . . . . . . . . . . . . . . . . . . . . . . . . Alexandros Seretakis Shareholders’ Derivative Suits Against Corporate Directors, Following Cross-Border Mergers: A Functioning Remedy Within the EU? . . . . . . Georgios Zouridakis Part II

3 35

53 65

81

Cross-Border Mergers in European Company Law: Analysis in the Context of Various Areas of Law

Disclosure of Inside Information in Cross-Border Mergers . . . . . . . . . . . 103 Vassilios D. Tountopoulos Cross-Border Mergers and Cross-Border Takeovers Compared . . . . . . 131 Matteo Gargantini The Relationship Between Article 4(1)(b) of the Cross-Border Merger Directive and the European Merger Regulation . . . . . . . . . . . . . 159 Marco Corradi and Julian Nowag

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Unions’ Freedom to Establish and Provide Services . . . . . . . . . . . . . . . . 175 Ewan McGaughey Tax Mergers Directive: Basic Conceptualisation . . . . . . . . . . . . . . . . . . . 193 Georgios Matsos Procedural Harmonisation in Cross-Border Mergers . . . . . . . . . . . . . . . 209 Michael Kyriakides and Fryni Fournari Part III

National Experiences from the Implementation of the Cross-Border Mergers Directive in Some Member States

Experiences from the Implementation of the Cross-Border Mergers Directive in Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Georg Gutfleisch Experiences from the Implementation of the Cross-Border Mergers Directive in Cyprus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 Thomas Papadopoulos Cross-Border Mergers: The Danish Experience . . . . . . . . . . . . . . . . . . . 275 Hanne S. Birkmose Cross-Border Mergers in France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 Bénédicte François The Implementation of the Cross-Border Mergers Directive (2005/56/EC) in Germany: A Story of Insufficiencies and (Better) Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 Sebastian Mock Experiences from the Implementation of the Cross-Border Mergers Directive in Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 Thomas Papadopoulos The Implementation of the Cross-Border Mergers Directive in Italy: An Overview with a Critical Assessment of Dissenting Shareholders’ Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Sergio Gilotta The Implementation of the Cross-Border Mergers Directive in Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 Isabelle Corbisier Implementation of the Cross-Border Merger Directive in the Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 M. A. Verbrugh Cross-Border Mergers: Experiences from Poland . . . . . . . . . . . . . . . . . . 425 Ariel Mucha and Arkadiusz Radwan

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The Mutual Influence Between Cross-Border Merger and Common Merger Regimes in Spanish Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 Alfonso Martínez-Echevarría Cross-Border Mergers Directive and Its Impact in the UK . . . . . . . . . . . 477 Jonathan Mukwiri

Editor and Contributors

About the Editor Thomas Papadopoulos is an Assistant Professor of Business Law at the Department of Law of the University of Cyprus. He received a degree of DPhil in Law (2010), a degree of MPhil in Law (2007) and a degree of Magister Juris-MJur (2006) from the Faculty of Law, University of Oxford, UK. He also received his LLB with Distinction (ranked 1st) from the Department of Law, Aristotle University of Thessaloniki, Greece (2005). Previously, he was a visiting researcher at Harvard Law School (2009–2010). He is also a Visiting Professor at International Hellenic University and an Attorney at law (Greece). Moreover, he is an Editorial Secretary of European Company Law (ECL) Journal. He was awarded the “Cyprus Research Award-Young Researcher (2014)” of the Research Promotion Foundation of the Republic of Cyprus (category of ‘Social Sciences & Humanities’). This distinction was awarded on the basis of his research on Takeovers and Mergers and was accompanied by a research grant. He is the Project Coordinator of the Research Project “Takeovers and Mergers in European, Cypriot and Greek Company Law”, which is financed by the Research Promotion Foundation of the Republic of Cyprus. His articles were published in many top international law journals.

Contributors Thomas Biermeyer Maastricht University, Faculty of Law, Maastricht, The Netherlands Hanne S. Birkmose Aarhus University, Aarhus BSS, Department of Law, Aarhus, Denmark Isabelle Corbisier University of Luxembourg, Esch-sur-Alzette, Luxembourg xxiii

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Marco Corradi Stockholm Centre for Commercial Law and Stockholm University, Stockholm, Sweden Oxford University Institute for European and Comparative Law, Oxford, UK Fryni Fournari Corporate Law Department, Harris Kyriakides LLC, Larnaca, Cyprus Bénédicte François Paris Est Créteil University (Paris 12), Faculty of Law, Paris, France Matteo Gargantini University of Utrecht, Utrecht, The Netherlands Sergio Gilotta University of Bologna, Department of Legal Studies, Bologna, Italy Georg Gutfleisch Brandl & Talos Rechtsanwälte GmbH, Vienna, Austria Michael Kyriakides Corporate Law Department, Harris Kyriakides LLC, Larnaca, Cyprus Alfonso Martínez-Echevarría University CEU San Pablo, Madrid, Spain Georgios Matsos International Hellenic University, School of Economics, Business Administration and Legal Studies, Thessaloniki, Greece Matsos & Associates Law Office, Thessaloniki, Greece Ewan McGaughey King’s College London, London, UK Marcus Meyer Maastricht University, Faculty of Law, Maastricht, The Netherlands Sebastian Mock Vienna University of Economics and Business, Vienna, Austria Federico M. Mucciarelli University of Modena and Reggio Emilia, Modena, Italy SOAS, University of London, London, UK Ariel Mucha Jagiellonian University, Law and Administration Faculty, Kraków, Poland Jonathan Mukwiri Durham Law School, Durham University, Durham, UK Julian Nowag Lund University, Lund, Sweden Oxford University Centre for Competition Law and Policy, Oxford, UK Thomas Papadopoulos University of Cyprus, Department of Law, Nicosia, Cyprus Arkadiusz Radwan Polish Academy of Sciences - Scientific Centre in Vienna, Vienna, Austria Vytautas Magnus University, Kaunas, Lithuania Allerhand Institute, Kraków, Poland University of Social Sciences, Łódź, Poland

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Alexandros Seretakis Trinity College Dublin, School of Law, Dublin, Ireland Vassilios D. Tountopoulos University of the Aegean, Chios, Greece M. A. Verbrugh Erasmus University Rotterdam, Rotterdam, The Netherlands Georgios Zouridakis Athens Institute for Education and Research, Athens, Greece

Part I

Cross-Border Mergers: EU and Comparative Perspectives

Reviewing the Implementation of the Cross-Border Mergers Directive Thomas Papadopoulos

1 Introduction This chapter aims at reviewing the implementation of the Cross-border Mergers Directive, the 10th Company Law Directive (hereinafter, “CBMD”).1 It examines the experiences so far from the application of the CBMD in the context of the internal market. It focuses on specific findings and arguments arising from the implementation of the CBMD by Member States. This chapter scrutinizes the most important parts of the “Study on the Application of the Cross-Border Mergers Directive” (hereinafter the “Study”) prepared by Bech-Bruun and Lexidale for the Directorate General for the internal market and services of the European Commission (MARKT/2012/031/F). This Study assists us in identifying the strengths and the weaknesses of the CBMD. This chapter provides a critical overview of the main findings of this Study, which constitutes the cornerstone of this chapter. Two other reports scrutinizing the implementation of the CBMD are also considered carefully: (1) “Cross-Border Mergers and Divisions, Transfers of Seat: Is there a Need to

1 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. [2005] OJ L 310/1–9 (Cross-border Mergers Directive). This Directive was repealed and codified by EU Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. This codification took place in the interests of clarity and rationality, because Directives 82/891/EEC and 89/666/EEC and Directives 2005/56/EC, 2009/101/EC, 2011/35/EU and 2012/30/EU have been substantially amended several times (Recital 1 of the Preamble). However, this chapter would refer exclusively to the Cross-border Mergers Directive (hereinafter, “CBMD”), because the various studies, reports and papers refer to this specific directive. Only part “9) Proposal for amendments to the CBMD.” would refer to Directive 2017/1132, because the relevant proposal refers to this directive.

T. Papadopoulos (*) University of Cyprus, Department of Law, Nicosia, Cyprus e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_1

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Legislate?” prepared by Prof. J. Schmidt as a Study for the Directorate General for Internal Policies, Policy Department C: Citizens’ Rights and Constitutional Affairs of the European Parliament in 2016, (2) “Ex-post analysis of the EU framework in the area of cross-border mergers and divisions” (European Implementation Assessment) prepared by Prof. E. Truli as a Study for the Directorate-General for Parliamentary Research Services of the Secretariat of the European Parliament in 2016. More specifically, this chapter comments on various findings of the Study and the rest of the reports revealing the advantages and the disadvantages of the CBMD. The focus of this chapter is on company law matters of cross-border mergers, while only a brief reference to the most important aspects of employee participation and taxation is made. Member States had to implement the CBMD by 15 December 2007. More than 10 years had passed since that date. This provides a safe point for evaluating the implementation of the CBMD. This chapter seeks to demonstrate that the CBMD is a revolutionary piece of secondary EU law, which facilitates significantly cross-border mergers activity at EU level. Apart from the advantages, this chapter scrutinizes the various important disadvantages of the CBMD. On the one hand, the CBMD constitutes the backbone of the EU M&As market by allowing a very important cross-border corporate restructuring technique, which was not available before its adoption at EU level. On the other hand, the harmonized regime on cross-border mergers suffers by many important problems, which restrict the efficiency of this directive. Although the CBMD is characterized by many disadvantages, most of these disadvantages are procedural and could be overcome by further harmonization. Nevertheless, some of these procedural problems raise difficult policy issues, such as creditor protection and protection of minority shareholders, which are inherent to the legal diversity among national company laws. The proposals seeking to address these deficiencies are also discussed.

2 The Main Benefits of the CBMD The CBMD transformed completely the M&As landscape at EU level. Before the adoption of the CBMD, the European Company Statute (Regulation 2157/2001) was the only piece of secondary EU legislation offering the possibility of a cross-border merger. It offered the possibility to form a European Company (Societas EuropaeaSE) through a cross-border merger. There is now a consolidated set of harmonized rules, which facilitate cross-border M&A activity in the internal market. Before the adoption of the CBMD, there was no harmonized framework for cross-border mergers.2 The availability of cross-border mergers depended on the choices of national legislatures. Quite often, cross-border

2 Before the adoption of the CBMD, companies from different Member States willing to proceed to a cross-border merger had to choose alternatives, such as “dual company structures” (e.g. Royal

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mergers were not allowed at all or were almost impossible due to insurmountable barriers by certain Member States. The CBMD made available at EU level this very important corporate restructuring technique.3 EU legislative intervention into crossborder mergers was considered to be of paramount importance. Without a harmonizing legal instrument, cross-border mergers would be impossible or prohibitively expensive.4 J. C. Coates IV provides two succinct definitions for M&A and corporate restructuring: “‘M&A’ is a deliberate transfer of control and ownership of a business organized in one or more corporations.” and “‘restructuring’ is a deliberate, significant and unusual alteration in the organization and operations of a business, commonly in times of financial or operational distress, typically accompanied by changes in ownership or finance, as when a company merges two divisions, or sells off a business unit.”5 The CBMD, as a regulatory instrument aiming at harmonization, should be examined in the context of these two definitions. The transfer of control and ownership and the alteration in the organization and operations of a business are the sources of various conflicts and procedural issues, which the CBMD is called to deal with. This situation is aggravated by the wide variety of methods used to regulate these issues, which are adopted by various Member States.6 The CBMD is called to draw some subtle lines and to take some careful decisions in order to reach a balance in the harmonized standards. The CBMD regulates freedom of establishment through conflict of law rules and some specific substantive law rules. First, the CBMD adopts conflict of law and international procedural rules by allocating competences to regulate and to supervise every specific aspect of the cross-border merger. Secondly, the CBMD has substantive law rules specifically designed for cross-border situations.7 The Study concluded some very interesting findings regarding the benefits of the CBMD. The general benefits of the CBMD are the following: opening the internal market, reducing organizational & operational costs, reducing regulatory costs, lowering agency costs and procedural simplification.8 The specific main benefits of the Directive, as identified by the Study, are the following: harmonization of conflicting laws,9 overcoming stalemates caused by shareholder unanimity

Dutch/Shell (NL/UK), Fortis (NL/Be), Unilever (NL/UK) and Reed Elsevier (NL/UK)). Zaman (2006), pp. 127–129. 3 For a critical overview of the provisions of the CBMD, see: Vermeylen (2012); Ugliano (2007), pp. 585–617; van Gerven (2010), pp. 3–28; Wyckaert and Jenne (2010), pp. 302–305. 4 Grundmann (2012), p. 698; Rickford (2005), pp. 1393–1414. See, also: Truli (2016), p. 23. 5 Coates IV (2015), p. 3. 6 For an analysis of the variety of acquisition forms, see: Carney (2009), pp. 10–37; Cahn and Donald (2010), pp. 623–636. 7 Grundmann (2012), p. 703. 8 Bech-Bruun and Lexidale Study (2013), pp. 6–9. 9 Truli (2016), p. 25.

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requirements, enhancing protection for creditors and minority shareholders,10 simplified procedure, efficiency gains through group reorganization,11 special advantages for the banking sector, facilitating cross-border company seat transfers,12 new tax-planning opportunities through the Directive and cutting through red tape.13 The drivers of cross-border mergers are the following: synergies and business strategy, reducing organizational costs,14 minimizing costs of regulatory compliance, tax planning and business-friendly regulatory environment.15 Cross-border mergers could also result in regulatory competition among different Member States, because seat transfers could also take place through cross-border mergers. It seems that the CBMD serves also certain objectives for the regulation of M&As as set by law & economics. These goals are the following: elucidation of authority and control over M&A by corporate decision makers16; reduction of transaction costs and confronting collective action problems; restriction and improvement of outcomes of conflict-of-interest transactions; protection and enhancement of power of dispersed owners of public companies; discouragement or mitigation of looting, asset-stripping and excessive M&A-related leverage; and tackling the side effects and the negative impact of other regulations.17 All these benefits of a cross-border merger were assessed positively by market participants and resulted in a satisfactory number of cross-border mergers at EU level. According to empirical researches, for the period 2008–2012, 1227 crossborder mergers took place18 and, for the period 2013–2017, 1163 cross-border mergers took place.19 The significant increase of the cross-border merger activity in Europe (more than 170%), since the introduction of the CBMD, underpins the argument that the CBMD is considered as a very successful harmonizing legal instrument despite its disadvantages discussed below.20

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Truli (2016), p. 25. Truli (2016), p. 27. 12 Truli (2016), p. 27. 13 Bech-Bruun and Lexidale Study (2013), pp. 14–27. Cross-border mergers also increase regulatory competition between Member States, when bureaucratic processes are simplified or abolished and when taxes are diminished. Truli (2016), p. 28. 14 Truli (2016), p. 28. 15 Bech-Bruun and Lexidale Study (2013), p. 9. For an analysis of the strategic and financial motivation for M&As in US, see: Carney (2009), pp. 7–10. 16 H. Manne argues that “the control of corporations may constitute a valuable asset, that this asset exists independent of any interest in either economics of scale or monopoly profits, that an active market for corporate control exists, and that a great many mergers are probably the result of the successful workings of this special market”. Manne (1965), pp. 110–120, 112. See, also: Carney (1999), pp. 215–255; McChesney (1999), pp. 245–252. 17 Coates IV (2015), p. 3. 18 Bech-Bruun and Lexidale Study (2013), pp. 5–6. 19 Biermeyer and Meyer (2018), p. 5. 20 Truli (2016), p. 21. 11

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3 Article-by-Article Analysis of the CBMD: Difficulties, Disadvantages and Proposals for Possible Reforms 3.1

Introduction: Obstacles to Cross-Border Mergers and Various Drawbacks of the CBMD

Although the CBMD was the legal instrument making for the first time cross-border mergers possible and offering one additional possibility for corporate restructuring at EU level, it is characterized by some disadvantages. We should not underestimate the advantages that the CBMD offers. However, certain parts of the directive could be ameliorated and further developed in order to offer a better corporate restructuring technique. The Study identified various categories of obstacles: under-harmonization of rules, absence of clear standards on inter-agency communications, obstacles pertaining to safeguards for stakeholders and a need for a fast track.21 In particular, barriers include: complexities with creditor protection, commencement date of the creditor protection, duration of the creditor protection, consequences of creditor protection, different procedures for creditor protection and absence of “fast-track” procedure.22 The Study also specified gaps and potential inconsistencies of the directive and showed the way towards trends and developments.23 An article-by-article analysis of the Directive reveals certain problems and deficiencies, which were reported from the experiences of its implementation. Possible solutions to these problems are proposed, in case of a future amendment of the CBMD. The basis of this article-by-article analysis is the Study, which specified these problems. As mentioned above, various other studies, reports, papers and researches are also considered. It is interesting to examine the problematic provisions of the CBMD and the recommendations for reform, as identified by the Study and the other reports.

3.2

Scope

Art. 1 regulates the scope of the CBMD. According to the Study, a practical difficulty related to this provision is that companies have to fulfill cumulative criteria: they must have been formed according to the law of a Member State and must have the company’s registered office, central administration, or principal place of business (a connecting factor) within the EU/EEA. A proposed amendment is that the directive should also expand its scope to companies that have not been formed in

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Bech-Bruun and Lexidale Study (2013), pp. 9–13. Bech-Bruun and Lexidale Study (2013), pp. 31–36. 23 Bech-Bruun and Lexidale Study (2013), pp. 13–15. 22

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the EU/EEA but have been converted into an EU/EEA company law form.24 The requirement of Art. 1 that only limited liability companies25 formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the EU could merge under the CBMD limits the possibility of cross-border mergers through the CBMD. Hence, companies formed in a non-EU jurisdiction and having transferred their seat to an EU Member State are excluded from the scope of the CBMD and cannot benefit from this crossborder corporate restructuring mechanism.26 As mentioned above, in a possible reform of the CBMD, the scope of Art. 1 could be extended in order to include companies, which have been formed in a non-EU State, but they have transferred their seat to an EU Member State and have been converted into a company type of this EU Member State.27 Hence, such companies could also enjoy the benefits of the CBMD. Generally, the limitation of the scope of the CBMD to limited liability companies, according to Arts. 1 and 2(1), is considered as a significant disadvantage. In a possible amendment, the scope of the CBMD could be extended to all legal persons falling within the scope of Art. 54 TFEU.28 This proposal for reform is compatible with the exercise of the EU freedom of establishment by these legal persons. In SEVIC, the CJEU held that cross-border mergers constitute an exercise of the EU freedom of establishment.29 Nevertheless, the current scope of Art. 2 containing certain definitions is considered to be sufficient. The Study found that, in accordance with case law of the CJEU (SEVIC,30 Cartesio,31 Vale32), some Member States have expanded the type of companies that can benefit from the CBMD provisions.33

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Bech-Bruun and Lexidale Study (2013), p. 29. Storm (2010), pp. 72–73. 26 Truli (2016), p. 36. Bech-Bruun and Lexidale Study (2013), p. 85. According to Art. 3(3), this Directive shall not apply to cross-border mergers of UCITS. Arts. 37–48 of the UCITS Directive harmonize mergers of UCITS. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) [2009] OJ L 302/32–96. See, also Brasseur and Vermeylen (2012), pp. 61–79. 27 Truli (2016), pp. 36–37. 28 Schmidt (2016), p. 17. Truli (2016), pp. 35–36. 29 Case C-411/03 SEVIC Systems AG EU:C:2005:762, paragraph 19. 30 Case C-411/03 SEVIC Systems AG EU:C:2005:762. 31 Case C-210/06 Cartesio Oktató és Szolgáltató bt EU:C:2008:723. 32 Case C-378/10 VALE Építési kft EU:C:2012:440. 33 Bech-Bruun and Lexidale Study (2013), p. 29. 25

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Conditions Relating to Cross-Border Mergers: The Available Company Types

Art. 4 refers to conditions relating to cross-border mergers. Art. 4(1) requires crossborder mergers to be applicable only to companies that can merge under domestic law. The Study reports difficulties when private and public companies merge in certain Member States due to Art. 4(1) allowing Member States to choose which types of companies could merge with others. A solution to this problem would be to allow mergers between different company types in general.34 Art. 4(1) is also obscure regarding whether companies have to be able to merge under the law of all involved Member States. This provision needs to be clarified. This clarification could refer to either the acquirer Member State’s laws or the acquired Member State’s laws.35 Either of these approaches serves also legal certainty.

3.4

Cash Payment

With regard to cash payment, Art. 2(2)(a) and (b) requires cross-border mergers in exchange for the issue to their shareholders of securities or shares representing the capital of that other company or the new company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares. The reason behind this 10% limit, which also exists in the Third Company Law Directive on Domestic Mergers,36 is that the cross-border merger retains its character and is not assimilated with a takeover bid. Nevertheless, the 10% limit does not restrict Member States and, theoretically, they can adopt a 99.99% cash payment. This is a minimum harmonization provision. Art. 3(1) states that the 10% restriction of Art. 2(2)(a) and (b) might not apply in certain cases; a cross-border merger exceeding the 10% limit can take place, where the law of at least one of the Member States concerned allows the cash

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Bech-Bruun and Lexidale Study (2013), p. 29. See, also: Truli (2016), p. 36. Bech-Bruun and Lexidale Study (2013), p. 29. 36 The Third Council Directive 78/855/EEC was repealed and replaced by Directive 2011/35/EU. Directive 2011/35/EU was repealed and codified by Directive 2017/1132. This codification took place in the interests of clarity and rationality, because Directives 82/891/EEC and 89/666/EEC and Directives 2005/56/EC, 2009/101/EC, 2011/35/EU and 2012/30/EU have been substantially amended several times (Recital 1 of the Preamble). This chapter would refer to the “Third Company Law Directive on Domestic Mergers”, because international bibliography and studies refer to this specific directive. Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies [1978] OJ L 295/36–43. Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies [2011] OJ L 110/1–11. Directive 2017/ 1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. 35

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payment referred to in points (a) and (b) of Art. 2(2) to exceed 10% of the nominal value.37 According to the data of the Study, 8 Member States have not adopted such a limit for cash payments.38 This provision allows companies to structure the merger according to their own needs. The possibility of cash payments above the 10% limit provides flexibility to companies and is adjusted to their liquidity and to their business environment. Nevertheless, the meaning of Art. 3(1) presents some problems. It mentions ‘securities’, which seems to refer to bonds or securities forming part of the relevant consideration. However, this does not make sense, because these instruments would not have a nominal or par value.39 C. A. Krebs defines freeze-out as “a transaction in which a controlling shareholder forces out the minority shareholders and compensates them in cash or stock.”40 The CBMD does not harmonize the freeze-out mergers. Each Member State enjoys discretion with regard to minority shareholders’ protection in mergers, where the parent company has less than 90% of the share capital of the subsidiary. In mergers where the controlling shareholder possesses less than 90% of the share capital, the approach of various Member States to freeze-outs is not clearly and sharply outlined and sometimes is characterized by ambiguity.41 The minimum requirements on minority shareholders’ protection adopted by CBMD and the Third Company Law Directive on Domestic Mergers apply to such cases, where the parent company has less than 90% of the share capital of the subsidiary. A general conclusion, which could be inferred on freeze-out mergers at EU level, is that Member States, beyond these minimum requirements introduced by the CBMD and the Third Company Law Directive on Domestic Mergers, adopted a “neutral” stance in their national cross-border mergers laws, which does not dynamically enhance freeze-outs, in contrast to US law.42

3.5

Creditor Protection

A cross-border merger could endanger the creditors’ rights. First, assets of the acquiring company could be exceeded by its liabilities and, secondly, the new law applicable to the resulting company could affect adversely the rights of creditors (e.g. insolvency legislation and the danger of forum-shopping).43 Art. 4 (2) focuses, among others, on creditor protection. This provision allows Member States to adopt

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Bech-Bruun and Lexidale Study (2013), p. 110. Bech-Bruun and Lexidale Study (2013), pp. 110–111. 39 Andenas and Wooldridge (2010), pp. 494–495. van Gerven (2010), p. 9. 40 Krebs (2012), p. 941. 41 Kraakman et al. (2017), p. 189. 42 Kraakman et al. (2017), p. 190. 43 Raaijmakers and Olthoff (2008), p. 305. See Bech-Bruun and Lexidale Study (2013), p. 52. Truli (2016), p. 37. 38

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additional protection mechanisms for creditors. There is not a single procedure for creditor protection at EU level. Member States adopt different procedural requirements, such as creditor meetings, asking and providing for guarantees and separate management of assets and liabilities. These practical difficulties arising from all these diverse sources could be confronted by further harmonization.44 Creditor protection could be offered through two mechanisms on the basis of the beginning of the protection period: either through an ex ante or an ex post protection system.45 On the one hand, the ex ante protection offers the possibility to creditors to exercise their rights against the merging company. On the other hand, the ex post protection offers the possibility to creditors of the merging companies to exercise their rights against the company resulting from the merger, which might be located abroad.46 The disadvantage of the ex post mechanism that the enforcement of creditor rights might confront difficulties in case of a resulting company located abroad is mitigated by the availability of the Brussels Ibis Regulation.47 The disadvantage of the ex ante mechanism is that long protection periods could delay or even result in abandoning the cross-border merger; the protection period should be rather short.48 The existence of these two different mechanisms results in an irreconcilable situation of different dates, where one of the participating companies is located in a Member State with an ex ante mechanism and the other participating company is located in a Member State with an ex post mechanism.49 The optimal solution to these disadvantages would be an ex post protection mechanism providing the possibility to creditors to acquire adequate safeguards (security in the form of a debt payment guarantee) from the resulting company within a specific and rather short period of time (e.g. 6 or 9 months) after the completion of the cross-border merger without allowing creditors to delay or even to cancel the merger process.50 A possible amendment to the CBMD could also deprive Member States of granting veto rights to creditors.51 There were two different arguments on the regulation of creditor protection required by Art. 4(2). On the one hand, it was argued that special provisions dedicated to creditor protection must be adopted. On the other hand, it was argued that Art. 4(2) refers to Arts. 13–15 of the Third Company Law Directive on Domestic Mergers regarding creditor protection.52 This ambiguity was solved by

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Bech-Bruun and Lexidale Study (2013), p. 30. Schmidt (2016), p. 20. Schmidt (2016), p. 18. 46 Schmidt (2016), p. 18. 47 Regulation 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2012] OJ L 351/1. Truli (2016), p. 42. 48 Schmidt (2016), pp. 18–19. 49 Bech-Bruun and Lexidale Study (2013), p. 54. Truli (2016), p. 38. 50 Schmidt (2016), p. 19. Truli (2016), p. 42. 51 Truli (2016), p. 41. 52 Schmidt (2016), p. 18. 45

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KA Finanz, where the CJEU adopted the latter view: “As regards the protection of the interests of creditors in the case of a cross-border merger, on which Sparkasse Versicherung relies in its claim in the alternative, the Court notes that recital 3 and Art. 4 of Directive 2005/56 state that a company participating in a cross-border merger remains subject, as far as, inter alia, the protection of its creditors is concerned, to the provisions and formalities of the national law which would be applicable in the case of a national merger. It follows that the provisions governing the protection of the creditors of the acquired company, in a case such as that at issue in the main proceedings, are those of national law which were applicable to that company. In so far as, in the case of a national merger, the Member States must act in accordance with Articles 13 to 15 of Directive 78/855 in relation to the protection of creditors, they must therefore also adhere to those provisions in the case of a crossborder merger.”53 [emphasis added] Although this case clarified certain crucial issues of creditor protection, certain problems remain. Arts. 13–15 of the Third Company Law Directive on Domestic Mergers are minimum harmonization provisions, which allow Member States to adopt diverging national regimes and timeframes. Arts. 13–15 of the Third Company Law Directive on Domestic Mergers ask for adequate safeguards for creditors, but the timeframe and the mechanics for the provision of these adequate safeguards are not harmonized. Hence, they result in different safeguards among the Member States, which deter cross-border mergers.54 Obviously, in a future reform of the CBMD, only further harmonization could clarify these points and could lead to more uniform standards. While the prevailing method for creditor protection is through ‘creditor security’, there are certain procedural differences in creditor protection mechanisms among Member States.55 The first difference concerns the type of authority that decides on whether security should be provided. It is either a national court or a national corporate registry.56 Moreover, some Member States granted veto rights to creditors, while others abstained from this practice. This model bestows on creditors the power to block or to delay mergers, in which their debtors participate. Creditors could continue to block the cross-border merger until their rights are secured. While this model contributes to legal certainty by securing the rights of creditors, there is always the danger of abuse by blocking or delaying abusively the cross-border merger.57 It is easily understood from the different approaches adopted by Member States that creditor protection in cross-border mergers at EU level is characterized by wide

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Case C-483/14 KA Finanz AG v Sparkassen Versicherung AG Vienna Insurance Group ECLI: EU:C:2016:205, paragraphs 60–62. Schmidt (2016), p. 18. 54 Schmidt (2016), p. 18. See, also: Raaijmakers and Olthoff (2008), pp. 305–308. 55 Truli (2016), pp. 38–39. 56 Truli (2016), p. 39. 57 Bech-Bruun and Lexidale Study (2013), pp. 55 and 59 et seq. Truli (2016), p. 39.

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legal diversity. Only further harmonization of creditor protection could mitigate the externalities of the complicated national legal regimes and could contribute to legal certainty at EU level. In particular, future further harmonization could focus on the starting point in time and the duration of creditor protection and on the procedural aspects of the creditor protection systems.58

3.6

Protection of Minority Shareholders

The CBMD does not have special rules for the protection of minority shareholders. Art. 4(2) provides the option to Member States to adopt national rules on the protection of minority shareholders. Art. 4(2) authorizes Member States to adopt the relevant rules for the protection of minority shareholders: “Member State may, in the case of companies participating in a cross-border merger and governed by its law, adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger.”59 This additional minority shareholders’ protection is deemed to be essential for the facilitation of cross-border mergers, taking into account that the harmonization of company law is still incomplete and does not cover all areas of company law and that, as a result, there are still important differences between national company laws on that matter.60 This results in a wide diversity of minority shareholders’ protection regimes among Member States, which curbs cross-border mergers activity at EU level. Hence, full harmonization of the mechanics for the protection of minority shareholders appears to be the best solution.61 Various dangers threaten minority shareholders in cross-border mergers. Some of the dangers are: divergences in the valuation of assets and liabilities and of the merger ratio, proposed amendments to the company’s articles of association and restriction of the shareholders’ rights under a new national regime.62 Regarding the time framework, the procedure for the protection of minority shareholders could be launched either on the general meeting of shareholders or on the date of the registration or publication of the registration of the cross-border merger with the national corporate registry.63 Minority shareholders should also be protected from inadequate share exchange ratio. This protection of minority shareholders against insufficient merger ratio could encompass the right to get an additional compensation. If liquidity issues inhibit companies from giving additional cash payment,

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Truli (2016), p. 41. Schmidt (2016), p. 19. See, also: Ventoruzzo (2007), pp. 47–75. Wyckaert and Geens (2008), pp. 288–296. 60 Kurtulan (2017), pp. 101–121, 101. 61 Schmidt (2016), pp. 20–21. 62 Truli (2016), p. 42. 63 Truli (2016), pp. 42–43. 59

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additional shares in the merged company could substitute the additional cash payment.64 The protection of minority shareholders is affected by grounds similar to creditor protection. According to the Study, certain difficulties arise from various sources. More specifically, both the duration and the date when the protection commences may vary. These variances cause significant practical problems.65 Regarding the date, the Study concluded that this provision can be activated both before and after the general meeting of shareholders, which might lead to a situation where both periods do not run simultaneously but must be added up.66 Moreover, duration varies between 1 month (the Netherlands), 6 months (Czech Republic), and no specific date (Lithuania).67 With regard to the consequences, in some Member States, the protection might block the merger or might lead to considerable delay.68 The treatment of debenture holders and holders of securities or shares, also mentioned in Art. 4 (2), as well as the right of national authorities to oppose a given cross-border merger on grounds of public interest, mentioned in Art. 4(1)(b), do not create any significant practical problems.69 The optimal method for the protection of minority shareholders is to grant them an exit right, according to which they have the right to sell their shares for fair compensation.70 This exit right for minority shareholders is provided already by some Member States in case of cross-border mergers and by certain European company law directives. (Art. 28 of the Third Company Law Directive on Domestic Mergers, Art. 16 of the Takeover Bids Directive and Art. 5(2) of the Sixth Company Law Directive on Domestic Divisions71).72

64

Schmidt (2016), pp. 20 et seq.; Truli (2016), p. 43. Bech-Bruun and Lexidale Study (2013), p. 30. In the method of setting up an SE through a merger, Art. 24 (2) of the European Company Statute provides the possibility for Member States to adopt appropriate mechanisms for the protection of minority shareholders. Ernst & Young (2009), p. 57. 66 Bech-Bruun and Lexidale Study (2013), p. 30. 67 Bech-Bruun and Lexidale Study (2013), pp. 30 and 34. See, also: European Company Law Experts (ECLE) (2012), pp. 8–9. 68 Bech-Bruun and Lexidale Study (2013), pp. 30 and 34. See, also: European Company Law Experts (ECLE) (2012), p. 9. 69 Bech-Bruun and Lexidale Study (2013), p. 30. In the method of setting up an SE through a merger, Art. 19 of the European Company Statute provides the possibility for Member States to veto the establishment of the SE by merger on grounds of public interest. Ernst & Young (2009), p. 57. 70 Schmidt (2016), p. 20. Truli (2016), p. 43. 71 Art. 28 of Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies [2011] OJ L 110/1, Art. 16 of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids [2004] OJ L 142/12, Art. 5 (2) of the Sixth Council Directive 82/891/EEC of 17 December 1982 concerning the division of public limited liability companies [1982] OJ L 378/47. 72 Truli (2016), p. 43. 65

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Various Problems Deriving from the Procedure, Which Must Be Followed, for the Completion of a Cross-Border Merger

Certain difficulties and problems derive from the relevant procedure, which must be followed for the completion of a cross-border merger. Art. 5 prescribes the details of the common draft terms of cross-border mergers. The Study found that there are difficulties with the differences in the decisive date for accounting purposes; this problem could be dealt with the prescription of a specific date.73 Art. 6 is dedicated to publication requirements. The problem starts from the fact that the date of reference is set against the general meeting of shareholders. As a matter of fact, the problem is created because if exceptions apply, a general meeting is not necessary and it is therefore not clear how the deadline is set. This problematic situation could be solved through the requirement to set a different date, in case a general meeting of shareholders does not have to take place.74 Art. 7 regulates the report of the management or administrative organ. The problems identified by the Study in this provision are: first, the deadline set against the general meeting; secondly, the differences in the length of the board reports; thirdly, this report is not necessary in cases where companies do not have employees and the shareholders unanimously waive it.75 Certain answers to these problems were proposed by the Study. First, a different date needs to be set, if a general meeting does not have to take place. Secondly, a “fast-track” option must be established. This “fast-track” option should include a waiver of the report if there are no employees and the shareholders unanimously waive it.76 If the company has employees, the report could still be waived if the employees agree to this waiver. This is because the merger report contributes to employee protection.77 Art. 8 dealing with the independent expert report has the same problem with the previous provisions: the date set against the general meeting. The answer to this problem should be the same with the previous provisions: a different date must be set, if a general meeting does not have to take place.78 Art. 9 (3) provides an exception for the approval of the mergers by the general meeting: “The laws of a Member State need not require approval of the merger by the general meeting of the

73

Bech-Bruun and Lexidale Study (2013), p. 31. Bech-Bruun and Lexidale Study (2013), p. 31. 75 Bech-Bruun and Lexidale Study (2013), p. 31. In the method of setting up an SE through a merger, Art. 31 (2) paragraph 2 of the European Company Statute provides the possibility for Member States to extend the provisions on simplified mergers (possibility of waiving the management or administrative body’s reports, the independent expert reports or experts and documents subjected to examination) to mergers where a company holds 90% or more but not 100% of the voting rights. Ernst & Young (2009), p. 57. 76 Bech-Bruun and Lexidale Study (2013), p. 31. Truli (2016), p. 48. 77 Schmidt (2016), p. 22. Truli (2016), p. 48. 78 Bech-Bruun and Lexidale Study (2013), p. 31. 74

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acquiring company if the conditions laid down in Art. 879 of Directive 78/855/EEC are fulfilled.” The Study states that it is unclear whether a different approval or other formality is required when the exception applies. This is definitely a practical difficulty. The European legislature should provide further clarification in a future amendment of the CBMD.80

3.8

National Competent Authorities, Pre-merger Certificate and Scrutiny of the Legality of the Cross-Border Merger

Art. 10 on the pre-merger certificate presents certain practical difficulties. According to the Study, there are differences in the competent authorities. Moreover, notaries are considered to be quicker and cheaper in comparison with courts. Furthermore, it is unclear which authority is competent in different Member States.81 The framework on the pre-merger certificate could be ameliorated if only complex and serious cases are subjected to courts. The compilation of information on the competent authority in a database is also proposed.82 There is a wide diversity among Member States in the form and content of the pre-merger certificate required by Art. 10(2) of the CBMD. Further harmonization could rectify this situation by adopting a standard form for the pre-merger certificate.83 Another issue spotted by the Study is that competent authorities are reported to verify whether all companies involved in a cross-border merger comply with the legal regime of this Member State. There is a different view on this issue and an amendment is proposed. The Study proposes a parallel track procedure where each

“Article 8 The laws of a Member State need not require approval of the merger by the general meeting of the acquiring company if the following conditions are fulfilled: (a) the publication provided for in Article 6 must be effected, for the acquiring company, at least one month before the date fixed for the general meeting of the company or companies being acquired which are to decide on the draft terms of merger; (b) at least one month before the date specified in (a), all shareholders of the acquiring company must be entitled to inspect the documents specified in Article 11 (1) at the registered office of the acquiring company; (c) one or more shareholders of the acquiring company holding a minimum percentage of the subscribed capital must be entitled to require that a general meeting of the acquiring company be called to decide whether to approve the merger. This minimum percentage may not be fixed at more than 5 %. The Member States may, however, provide for the exclusion of non-voting shares from this calculation.” Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies [1978] OJ L 295/36–43. 80 Bech-Bruun and Lexidale Study (2013), p. 31. 81 Bech-Bruun and Lexidale Study (2013), p. 32. 82 Bech-Bruun and Lexidale Study (2013), p. 32. 83 Schmidt (2016), p. 25. 79

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authority only reviews whether the company belonging to its jurisdiction has complied with all rules and formalities.84 As a matter of fact, some national competent authorities do not follow a two-step model of legal scrutiny pursuant to Arts. 10 and 11. These authorities examine the compliance of all merging companies with all requirements of the national law of the Member State of the national authority.85 This approach of the national authorities might surprise companies, which would have to comply with the requirements of another Member State and not only with the requirements of their home Member State, where compliance is already certified by the pre-merger certificate.86 The European Commission could also solve this deficiency by informing Member States about the mandatory nature of the two-step model of legal scrutiny and, if necessary, by taking action against inconsistent Member States.87 Art. 11 concerns the scrutiny of the legality of the cross-border merger. The Study discovers an inconsistency between Arts. 9 and 11 when approval by the general meeting of shareholders is not needed. When the approval of the general meeting is not necessary, because an exception applies (e.g. simplified merger), no approval could accompany the certificate in spite of the relevant condition. This inconsistency is against legal certainty. A possible reform of the CBMD could shed some light on this point by explicitly stating that in case of no requirement of approval of the draft terms of the merger, no approval has to accompany the certificate.88 An answer to this inconsistency is the possible clarification through harmonization of the consequence, as long as approval by the general meeting of shareholders is not required. Functioning of Art. 11 is aggravated by the problems related to Art. 10. The solutions to these problems proposed for Art. 10 also apply here.89

3.9

Registration

Art. 13 on registration of the merger suffers from a lack of clear and standardized system of communication between registries. This problem could be solved through the adoption of a standardized system with clear deadlines, which also deals with linguistic differences.90 Generally, the CBMD is characterized by problems relating to documentation and communication. Taking into account the problems of linguistic diversity and the necessity of a single language in documentation and communication in the context of cross-border mergers, English, as the business language,

84

Bech-Bruun and Lexidale Study (2013), p. 32. Schmidt (2016), p. 25. 86 Schmidt (2016), p. 25. 87 Schmidt (2016), p. 25. 88 Bech-Bruun and Lexidale Study (2013), p. 87. 89 Bech-Bruun and Lexidale Study (2013), p. 32. 90 Bech-Bruun and Lexidale Study (2013), p. 32. 85

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could probably be proposed as the single language of the whole cross-border merger process.91 Moreover, standard (electronic) forms and the new Business Registers Interconnection System (hereinafter, “BRIS”)92 could facilitate documentation and communication in cross-border mergers.93 Art. 2 of Directive 2012/17/EU amended Art. 13 of the CBMD regarding BRIS.94 Moreover, documentation is not harmonized. As a result, diverse documentation creates lots of procedural and bureaucratic barriers and increases the cost of the procedure. Hence, the relevant documentation needs to be standardized (e.g. the pre-merger certificate of Art. 10 (2)).95

3.10

Consequences of Cross-Border Mergers and Simplified Formalities

Regarding the consequences of cross-border mergers described in Art. 14, a serious problem identified by the Study has to do with the fact that, in certain Member States (e.g. United Kingdom), it is not clear whether the merger is binding on third-parties. The European legislature should provide further clarification in a future amendment of the CBMD.96 Art. 15 on simplified formalities is also characterized by certain obscure points. The Study discovers that as long as the exception applies, it is not clear whether different approval or formalization is necessary. Similarly, the European legislature should provide further clarification in a future amendment of the CBMD.97 Such an obscure point, which should be clarified by further harmonization, is the exemption introduced by Art. 15 in case of an upstream merger of a 100%-subsidiary. Art.

91

Schmidt (2016), p. 24. Arts 3a-ff. of the Publicity Directive (Directive 2009/101/EC of the European Parliament and of the Council of 16 September 2009 on coordination of safeguards which, for the protection of the interests of members and third parties, are required by Member States of companies within the meaning of the second paragraph of Article 48 of the Treaty, with a view to making such safeguards equivalent [2009] OJ L 258/11) and Commission Implementing Regulation (EU) 2015/884 of 8 June 2015 establishing technical specifications and procedures required for the system of interconnection of registers established by Directive 2009/101/EC of the European Parliament and of the Council [2015] OJ L 144/1. 93 Schmidt (2016), p. 24. 94 Directive 2012/17/EU of the European Parliament and of the Council of 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and companies registers, [2012] OJ L 156/1. See, also: Commission Implementing Regulation (EU) 2015/884 of 8 June 2015 establishing technical specifications and procedures required for the system of interconnection of registers established by Directive 2009/101/EC of the European Parliament and of the Council [2015] OJ L 144/1. 95 Truli (2016), p. 47. 96 Bech-Bruun and Lexidale Study (2013), p. 32. 97 Bech-Bruun and Lexidale Study (2013), pp. 32–33. 92

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15 does not explicitly waive such mergers from the requirement of a merger report. Although a merger report contributes to employee protection, simplification of the process in intra-group mergers demands the explicit inclusion of such mergers among this exception.98

4 Employee Participation Art. 16 on employee participation is characterized by some deficiencies. Employee participation in cross-border mergers is based on the employee participation of the European Company Statute (Council Directive 2001/86/EC).99 Nevertheless, the rules of employee participation in the CBMD have certain differences from the relevant provisions of Directive 2001/86/EC. Experience from the implementation of Art. 16 proves that the mechanism of employee participation in cross-border mergers is complicated, conflicting and often impractical. The wording of the CBMD in combination with the Council Directive 2001/86/EC is difficult to understand, is interpreted and transposed differently by various Member States and unavoidably leads to ambiguity and legal uncertainty.100 Clarification of the existing wording and explanation through further details on how exactly this mechanism is supposed to work constitute proposed solutions to these problems, which would contribute to legal certainty.101 The Study reaches some very interesting conclusions on these deficiencies of the employee participation. The procedure of Art. 16 on employee participation is too complex, time-consuming and very expensive. A proposal for a more streamlined procedure could solve this problem.102 Moreover, the issue regarding the imposition

98

Schmidt (2016), p. 22. Truli (2016), p. 48. Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees [2001] OJ L 294/22–32. For a more extensive analysis, see: Tepass (2012), pp. 123–142; François and Hick (2010), pp. 29–43; Storm (2010), pp. 74–78; Pannier (2005), pp. 1424–1442; Storm (2006), pp. 130–138; Αργυρóς (2007), pp. 321–334; Argyros (2007), pp. 321–334 (in Greek). 100 European Company Law Experts (ECLE) (2012), p. 9. In Commission v Netherlands, the CJEU examined employee participation in cross-border mergers: “by failing to adopt all the laws, regulations and administrative provisions necessary to ensure that the employees of establishments of a company resulting from a cross-border merger which has its registered office in the Netherlands, situated in other Member States enjoy participation rights identical to those enjoyed by the employees employed in the Netherlands, the Kingdom of the Netherlands has failed to fulfill its obligations under point (b) of Article 16(2) of Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies.” Case C-635/11 European Commission v Kingdom of the Netherlands ECLI:EU:C:2013:408. 101 European Company Law Experts (ECLE) (2012), p. 9. Despite the need for reforms, no shortterm reform of the rules on employee protection was proposed. Bech-Bruun and Lexidale Study (2013), p. 33. Schmidt (2016), p. 20. 102 Bech-Bruun and Lexidale Study (2013), p. 33. 99

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of sanctions for non-compliance with the employee participation requirements of Art. 16 is quite unclear. This deficiency could be confronted through the adoption of a provision similar to Art. 12103 of the European Company Statute.104 Furthermore, this provision does not include rules on information and consultation duties. In a future amendment, such provision should definitely be included in the CBMD.105 The Study also scrutinizes Art. 16(2) and discovers certain problems: first, it is not clear whether the exceptions of Art. 16(2) have to be applied cumulatively; secondly, Art. 16(2)(b) is to a certain extent vague and equivocal as to whether a deviation from the rule described in Art. 16(1) is only possible where employees are subject to an employee participation regime at the time when the cross-border merger becomes effective.106 In a future amendment of the CBMD, this part should be clarified further.107 Art. 16(4)(a) also demands further clarification since, according to the Study, it is unclear whether the relevant organs of the merging companies may choose to implement the standard rules on employee participation without prior negotiations.108 However, the employee participation rules of the CBMD are considered to be more flexible than the provisions of employee participation rules of the European Company (SE).109 103

Art. 12 of the European Company Statute. “1. Every SE shall be registered in the Member State in which it has its registered office in a register designated by the law of that Member State in accordance with Article 3 of the first Council Directive (68/151/EEC) of 9 March 1968 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community (6). 2. An SE may not be registered unless an agreement on arrangements for employee involvement pursuant to Article 4 of Directive 2001/86/EC has been concluded, or a decision pursuant to Article 3(6) of the Directive has been taken, or the period for negotiations pursuant to Article 5 of the Directive has expired without an agreement having been concluded. 3. In order for an SE to be registered in a Member State which has made use of the option referred to in Article 7(3) of Directive 2001/86/EC, either an agreement pursuant to Article 4 of the Directive must have been concluded on the arrangements for employee involvement, including participation, or none of the participating companies must have been governed by participation rules prior to the registration of the SE. 4. The statutes of the SE must not conflict at any time with the arrangements for employee involvement which have been so determined. Where new such arrangements determined pursuant to the Directive conflict with the existing statutes, the statutes shall to the extent necessary be amended. In this case, a Member State may provide that the management organ or the administrative organ of the SE shall be entitled to proceed to amend the statutes without any further decision from the general shareholders meeting.” Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE) [2001] OJ L 294/1–21. 104 Bech-Bruun and Lexidale Study (2013), p. 33. 105 Bech-Bruun and Lexidale Study (2013), p. 33. 106 Bech-Bruun and Lexidale Study (2013), p. 33. 107 Bech-Bruun and Lexidale Study (2013), p. 33. 108 Bech-Bruun and Lexidale Study (2013), p. 33. 109 Truli (2016), p. 26.

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5 Spillover Effects on Other Areas Outside of the CBMD There are also spillover effects on other areas outside of the CBMD. A serious obstacle is related to accounting. While some Member States demand the accounting date (decisive date) to precede the effective legal date (registration date), others demand the coincidence of both dates or allow both alternatives.110 The outcome is legal diversity, which creates lots of problems. According to the Study, differences in the decisive date among Member States may result in difficulties at completing a cross-border merger in the context of accounting. A possible solution, which is proposed, is to determine the same date for all Member States (e.g. the date of registration in the corporate registry, because this is an event that can be followed by creditors111) or to allow companies to adjust the date (to specify the decisive accounting date, in accordance with the specific elements of the individual merger112).113 It was argued that further harmonization of the rules on the determination of the accounting date must permit the merging companies to freely determine the decisive accounting date,114 as long as the procedures relating to the exercise of minority shareholder, creditor, and employee rights are given satisfactory time (e.g. a minimum period).115 Diverging valuation rules in cross-border mergers are quite problematic. First, the valuation of the merging companies determines the merger ratio and thus the share exchange ratio. Secondly, the valuation rules are crucial for the transfer value.116 The legal diversity of both aspects creates difficulties to cross-border mergers. Further harmonization is necessary. It was argued that the provisions on valuation regarding first, the determination of the merger ratio and, secondly, the transfer value could be harmonized.117 One solution to this problem could be the harmonization of valuation rules on merger ratio and on transfer value and, as a matter of fact, the adoption of a uniform standard for all Member States. Another solution would be a standardized menu of valuation methods allowing Member States to adopt the valuation method they prefer.118 Regarding valuation methods used in cross-border mergers, the Study found that differences in the valuation of assets and liabilities (fair vs. book value methods) might result in difficulties at the completion of a crossborder merger unless the acquiring company issues new shares.119 As an answer to Truli (2016), p. 48. See, also: Žárová and Skálová (2012), pp. 1224–1236, 1229–1232. Bech-Bruun and Lexidale Study (2013), p. 66. Truli (2016), p. 49. 112 Truli (2016), p. 49. 113 Bech-Bruun and Lexidale Study (2013), p. 34. 114 Schmidt (2016), p. 23. 115 Truli (2016), p. 49. 116 Schmidt (2016), p. 23. 117 Schmidt (2016), p. 23. See, also: Žárová and Skálová (2012), pp. 1224–1236, 1232–1234. 118 Truli (2016), p. 50. 119 Bech-Bruun and Lexidale Study (2013), p. 34. See, also: European Company Law Experts (ECLE) (2012), p. 8. 110 111

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this problem, the Study suggests that Member States should permit companies to choose whether they get assets at book or fair value.120 A practical problem arises as how to specify which expert(s) should be appointed in a cross-border merger in order to determine the fairness of the exchange ratio; there is a risk that different experts from different Member States, whose companies participate in the cross-border merger, could adopt different opinions.121 Moreover, minority shareholders could face the risk of an inadequate determination of the share exchange ratio; minority shareholders could receive additional compensation in case of an inadequate share exchange ratio (additional cash payments or additional shares due to liquidity problems).122 Timelines could also cause significant problems; differences in the timelines are responsible for serious complexities, delays and uncertainties in the merger procedure.123 Only the adoption of a harmonized timeline or the domination of a timeline of the acquirer’s company could overcome this problem.124 Tax rules for cross-border mergers continue to have certain problems. There are certain remaining difficulties with exit taxation, which could be mitigated through the removal of tax obstacles.125 However, this book chapter will not expand further into an analysis of the tax law problems of cross-border mergers.

6 Cross-Border Seat Transfers Through Cross-Border Mergers A cross-border seat transfer126 is possible through a cross-border merger. The mechanism of the CBMD allows cross-border seat transfers. Due to the lack of harmonization of seat transfers at EU level, the CBMD offers an alternative method for cross-border seat transfers. Nevertheless, there are certain difficulties with crossborder seat transfers taking place on the basis of the CBMD.127

120

Bech-Bruun and Lexidale Study (2013), p. 34. Bech-Bruun and Lexidale Study (2013), p. 34. See, also: European Company Law Experts (ECLE) (2012), p. 9. 122 Schmidt (2016), p. 20. 123 Bech-Bruun and Lexidale Study (2013), p. 34. 124 Bech-Bruun and Lexidale Study (2013), p. 34. 125 Bech-Bruun and Lexidale Study (2013), p. 34. See, also: Vande Velde (2012), pp. 88–122; Werbrouck (2010), pp. 44–53; Boulogne (2016), pp. 810–814; Vande Velde (2016), pp. 132–145; Zernova (2011), pp. 471–493; Benecke and Schnitger (2005), pp. 170–178; Žárová and Skálová (2014), pp. 25–49; Kollruss (2015), pp. 501–507; Zuijdendorp (2007), pp. 5–12; van Arendonk (2010), pp. 60–61; Boulogne (2014), pp. 70–91; Nikolopoulos (2006), pp. 161–165; Helminen (2011), pp. 172–178; Thommes and Tomsett (1992), pp. 228–240; Chown (1990), pp. 409–411. 126 Storm (2010), pp. 60–70; Wymeersch (2003), pp. 661–695; Vaccaro (2005), pp. 1348–1365; Mucciarelli (2008), pp. 267–303; Gerner-Beuerle and Schillig (2010), pp. 303–323; Biermeyer (2013), pp. 571–589; Biermeyer (2015), pp. 49–92. 127 Bech-Bruun and Lexidale Study (2013), p. 34. 121

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More specifically, a cross-border merger could be used as an alternative to reincorporations, which result in a change of the law applicable to companies. These de facto reincorporations taking place through a cross-border merger under the CBMD are implemented by setting up a new ‘shell’ company (usually a subsidiary) in another Member State and then merging the parent company ‘into’ the newly formed foreign company.128 While the two processes, a direct crossborder seat transfer and an (indirect) cross-border seat transfer through a crossborder merger, are quite similar, they present an important difference. One the one hand, a cross-border seat transfer on the basis of the CBMD requires the existence or the new establishment of a company in a different Member State. Hence, in a crossborder seat transfer through a cross-border merger the ownership of the assets and liabilities will change. On the other hand, a direct cross-border seat transfer is characterized by legal continuity of the company to the other jurisdiction, without the intervention of any other company/legal person. The latter process is very important for tax reasons.129 Moreover, tax law could make cross-border seat transfers through cross-border mergers more difficult as tax rules of certain Member States (e.g. UK) could demand, for anti-avoidance of tax reasons, that the participating companies have to exist in advance for a specific period of time before the cross-border merger takes place.130 It is obvious that the alternative way of conducting seat transfers through cross-border mergers cannot efficiently cover the gap caused by the absence of harmonization. A special harmonizing directive allowing cross-border seat transfers is a necessity. The need to reinvigorate the discussions for a directive harmonizing cross-border seat transfers and cross-border conversions of companies had re-emerged. This need is further supported by these difficulties deriving from the use of CBMD as an alternative to cross-border seat transfers.131 Recently, the European Commission contemplated these arguments and issued a Proposal for a Directive amending Directive 2017/1132 as regards to crossborder conversions, mergers and divisions.132

128

Gerner-Beuerle et al. (2016), pp. 216 and 345. Bech-Bruun and Lexidale Study (2013), pp. 81–82. See, also: European Company Law Experts (ECLE) (2012), pp. 7–8. Truli (2016), p. 27. 130 Bech-Bruun and Lexidale Study (2013), p. 82. 131 Bech-Bruun and Lexidale Study (2013), p. 34. 132 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD). 129

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7 The Amendments Already Adopted The amendments to the CBMD adopted so far were of a procedural and complementary nature and did not affect core provisions of the CBMD. The amendments were related to the simplification of the CBMD and to its better coordination with other directives in the area of company law and banking law. These amendments were quite specific and completed the functioning of the CBMD in the context of other harmonizing legal instruments. Simplification of the CBMD was not neglected in cases of abolishment of certain unnecessary bureaucratic requirements. For example, Directive 2009/109/EC133 amended the CBMD and exempted certain reporting and documentation requirements in case of mergers and divisions. Amendments to the CBMD could also derive from other areas of company law. Certain developments in the harmonization of company law have repercussions on corporate restructuring techniques, such as cross-border mergers, and demand amendments to the CBMD. For example, Directive 2012/17/EU134 as regards the interconnection of central, commercial and companies’ registers brought certain important changes on the CBMD. The CBMD was amended in order to ensure that communication between registers is carried out through the system of interconnection of registers.135 Amendments to CBMD concerned registration formalities and data protection. The new Art. 13 states: “The registry for the registration of the company resulting from the cross-border merger shall notify, through the system of interconnection of central, commercial and companies’ registers established in accordance with Article 4a(2) of Directive 2009/101/EC and without delay, the registry in which each of the companies was required to file documents that the cross-border merger has taken effect. Deletion of the old registration, if applicable, shall be effected on receipt of that notification, but not before.” Repercussions on the CBMD could also come from other areas of business law, such as banking law. The recovery and resolution of credit institutions and investment firms have special needs for flexibility and relaxed provisions, which could be achieved through exemption of certain conditions imposed by the CBMD. Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms demands appropriate derogations from the

133

Directive 2009/109/EC of the European Parliament and of the Council of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions. [2009] OJ L 259/14–21. 134 Directive 2012/17/EU of the European Parliament and of the Council of 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and companies registers. [2012] OJ L 156 1–9. 135 Recital 17 of the Preamble of Directive 2012/17/EU of the European Parliament and of the Council of 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and companies registers. [2012] OJ L 156 1–9.

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CBMD, which should be provided in order to allow a rapid action by resolution authorities.136 According to Art. 120 of Directive 2014/59/EU, in Art. 3 of the CBMD, the following paragraph is added: “4. Member States shall ensure that this Directive does not apply to the company or companies that are the subject of the use of resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU of the European Parliament and of the Council.”

8 Future Directions: The 2012 Company Law Action Plan In its 2012 Action Plan, the European Commission discussed possible amendments to the CBMD. The European Commission contemplated on the conclusions of the Study in order to see if a proposal for an amendment would be forwarded. The CBMD should be adjusted to the changing needs of the internal market, according to the experience gained and future needs in this field. Any possible future amendment should give emphasis on the enhancement of the procedural rules for cross-border mergers, because procedural deficiencies constitute a potential source of uncertainty and complexity. More problematic is the lack of harmonization regarding methods for valuation of assets, the duration of the protection period for creditors’ rights and the consequences of creditors’ rights on completion of the merger.137 As already mentioned above, quite recently, the European Commission issued a Proposal for a Directive amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions.138

136

Recital 122 of the Preamble of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council [2014] OJ L 173/190–348. 137 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Action Plan: European company law and corporate governance—a modern legal framework for more engaged shareholders and sustainable companies [2012] COM 740. 138 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD).

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9 Proposal for Amendments to the CBMD In April 2018, the European Commission issued a Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions.139 Apart from an amendment to CBMD, this Directive harmonizes for the first time other forms of corporate restructurings and transformations such as cross-border conversions and divisions.140 It would be interesting to refer to the most important proposed amendments to the CBMD. First, the definition of “merger” is expanded: “Article 119 is amended to include into a definition of a cross-border merger as an operation between companies in which a company being acquired transfers all its assets and liabilities into the acquiring company without issuing new shares. Such an operation will fall under the scope of this Article, if the merging companies are owned by the same person or the ownership structure in all merging companies remains identical after the completion of the operation.”141 This expansion of the definition means that asset transfers would fall within the scope of the CBMD and could also benefit from these harmonized rules at EU level.142 Moreover, Art. 120(4) is amended in order to exclude more categories from the scope of the CBMD. Hence, the CBMD would not catch: (a) proceedings have been instituted for the winding-up, liquidation, or insolvency of that company or companies; (b) the company is subject to preventive restructuring proceedings initiated because of the likelihood of insolvency; (c) the suspension of payments is on-going; (d) the company is subject to resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU; (e) preventive measures have been taken by the national authorities to avoid the initiation of proceedings referred to in points (a), (b) or (d).143 139

Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD). This part would not refer to CBMD, but to Directive 2017/1132 relating to certain aspects of company law, which codified the CBMD. EU Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. 140 See, also: Brasseur and Vermeylen (2012), pp. 80–83. 141 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD) 25–26. This proposed directive refers to provisions of Directive 2017/1132 relating to certain aspects of company law, which codifies the CBMD. EU Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. 142 See, also: Brasseur and Vermeylen (2012), pp. 83–87. 143 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 60.

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One of the most important innovations of this proposal for reform of the CBMD is the provision of exit rights to minority shareholders, who disagree with the crossborder merger. Dissenting minority shareholders could leave the company by selling their shares for adequate cash compensation. Shareholders remaining in the company have also the right to challenge the share-exchange ratio. The new Art. 126a of the proposal states: “The new Article 126a provides for safeguards for members. It establishes an exit right for those members that oppose the merger. This applies for either those who did not vote for the approval of the cross-border merger or those that do not agree with the merger but do not have voting rights. The company, remaining members, or third parties in agreement with the company must acquire the shares of the members exercising the exit right in exchange for adequate cash compensation. Since the existing rules on cross-border mergers already provide for the appointment of an independent expert (Article 125), this expert shall also review the adequacy of the cash compensation. If the members consider that the offered cash compensation has been inadequately set, they are entitled to demand for its recalculation by the national court. Members wishing to remain in the company have also right to challenge the share-exchange ratio which shall be explained and justified in the report referred to in Article 124.”144 It is obvious that the proposal contributes significantly to the protection of minority shareholders. The proposal does not only reinforce the rights of shareholders disagreeing with the cross-border merger, but also the right of shareholders, who conceded the cross-border merger, but were not satisfied with the share exchange ratio. The proposal ensures a fair treatment for both categories of shareholders, who either agreed or disagreed with the cross-border merger. This proposal also enhances creditor protection. The CBMD does not leave any more creditor protection to the discretion of Member States. The proposal suggests a system of creditor protection empowering creditors to ask for adequate safeguards from the competent authority. The new Art. 126b of the proposal states: “The new Article 126b provides for safeguards for creditors. First, Member States may require management or administrative organ of the merging company to make a declaration stating that they are not aware of any reason why the company resulting from the merger should not be able to meet its liabilities. Secondly, creditors who are dissatisfied with the protection offered to them in the draft terms of merger shall have the right to apply to the competent authority for adequate safeguards. However, the competent authority shall apply a rebuttable presumption that the creditors are not prejudiced by the cross-border merger if the company has offered a right to payment (against a third party guarantor or the company resulting from the merger) of the equivalent value to their original claim which may be brought before the same jurisdiction as the original claim, or if the independent expert report, which was disclosed to creditors, confirmed that the company would be able to satisfy its

144

Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 26–27.

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creditors. The provisions on creditor protection shall be without prejudice to the application of national laws concerning the satisfaction or securing of payments owed to public bodies.”145 This proposal faces some other challenges, which were revealed by the experiences so far from the implementation of the CBMD. The proposed amendments seek to clarify obscure points, to simplify complex issues and to expand the protective scope of the current legal regime. A new Art. 122a is added, which establishes “rules on determination of the date from which the transactions of the merging companies will be treated for accounting purposes”.146 Certain reforms concern the content and the publication of common draft terms of cross-border merger. First, the common draft terms of cross-border merger should, among others, include the offer of cash compensation for shareholders disagreeing with the cross-border merger, the safeguards received by the creditors and the language regime (amended Art. 122).147 Secondly, with regard to disclosure, “[t]he amended Article 123 provides, as a default rule, for the disclosure of the common draft terms in the business registers of the merging companies.”, but it takes into account the flexibility and alternatives of internet and digital technology.148 Moreover, the content of the report addressed to the members of the merging company shall be enriched with the following additional information: “(a) the implications of the cross-border merger on the future business of the company resulting from the merger and on the management’s strategic plan; (b) an explanation and justification of the share exchange ratio; (c) a description of any special valuation difficulties which have arisen; (d) the implications of the cross-border merger for members; (e) the rights and remedies available to members opposing the merger in accordance with Article 126a.” (Art. 124 as amended).149 The new Art. 124a introduces a report of the management or administrative organ to the employees: “The management or administrative organ of each of the merging companies shall draw up a report explaining the implications of the cross-border merger for employees”. The representatives of employees could express their

145

Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 27. 146 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 26. 147 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 26. 148 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 26. 149 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 26.

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opinion, which should be disclosed to shareholders and should be appended to the report.150 Other amendments focus on the pre-merger certificate. The amended Arts 127 and 128 propose that “Member States shall ensure that the application for obtaining a pre-merger certificate by the merging companies including submission of any information and documents may be completed online in its entirety without the necessity to appear in person before the competent authority” (amended Art. 127 (1)) and “[t]he pre-merger certificate or certificates referred to in Article 127(2) shall be accepted by a competent authority of a Member State of a company resulting from the cross-border merger as conclusive evidence of the proper completion of the pre-merger acts and formalities in the respective Member State or Member States.” (amended Art. 128(4)).151 Art. 131 clarifies the consequences of a cross-border merger by stating that: “Article 131 is amended by explaining that all the assets and liabilities of the company being acquired or of the merging companies include all their contracts, credits, rights and obligations.”152 The amendment to Art. 132 includes the extension of simplified formalities to the case, where the cross-border merger is conducted by companies, in which one natural or legal person has all their shares and sets a specific reference date for the disclosure, where no general meeting is required in any of the merging companies.153 With regard to employee participation, the amended Art. 133 (7) ensures the protection of employees’ participation rights is not evaded through subsequent domestic mergers during 3 years following the cross-border merger by including all possible subsequent domestic operations (i.e. mergers, divisions and conversions) and obliges companies to communicate to their employees whether they choose standard rules or negotiations with employees.154 Additionally, the new Art. 133a focuses on the liability of independent experts. It remains to be seen if this proposal will be adopted. Even if cross-border conversions would not be finally adopted due to regulatory competition concerns, the adoption of amendments to the CBMD will be a very positive step, as they will enhance the harmonized legal framework for cross-border mergers at EU level. The 150

Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 26. 151 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 27. 152 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 27. 153 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 27. 154 Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD), 27.

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rights of various stakeholders (shareholders, creditors, employees) are strengthened and their concerns about a deterioration of their position after the cross-border merger are alleviated. These proposed reforms facilitate cross-border mergers and, as matter of fact, contribute to an effective exercise of freedom of establishment through this cross-border merger technique. Apart from stakeholders’ rights, the proposal addresses some other problematic aspects of the CBMD. The possible adoption of the proposal will result in a well-structured, comprehensive and streamlined legal framework for cross-border mergers, which would constitute a crucial part of the corporate restructuring mechanism at EU level.

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Proposal to Introduce the Compulsory Share Exchange

Some of the CBMD’s problems arising from employee participation and from the protection of creditors and minority shareholders could be addressed by the introduction of the compulsory share exchange to the EU through a new directive. Crossborder corporate restructuring could be facilitated by the compulsory share exchange, a business combination mechanism widely used in the US.155 L. Enriques explains how the compulsory share exchange works in practice: “[i]n a compulsory share exchange, the acquiring company would offer to exchange its own shares for shares of the target that it does not already own. The difference between this transaction form and a share-for-share tender offer would be that the target and the acquiring companies’ shareholder meetings would vote on the transaction and, if approved, even the dissenting target’s shareholders would participate in the exchange. As a result of the transaction, the target company shareholders would become shareholders of the acquiring company (in a measure determined according to the exchange ratio approved by both companies), and the acquiring company would obtain 100% of the acquired company’s shares. Because a compulsory share exchange, as explained below, would leave worker (and creditor) rights unscathed, lawmakers may regulate this business combination form without requiring companies to undergo some of the cumbersome procedural steps that are currently mandated for cross-border mergers”.156 This corporate restructuring technique facilitates the exercise of freedom of establishment of companies through a business combination form. This possibility brings important benefits to the M&A market as a part of the internal market.157 In compulsory share exchange, acquisitions aiming at obtaining 100% control over another company, which remains as a separate legal person, are promoted. L. Enriques argues that the main advantage of

155

Enriques (2014), p. 214. Enriques (2014), p. 215. 157 Enriques (2014), p. 215. 156

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this business combination form for EU companies is that transaction costs arising from hold-out behaviour would be reduced.158

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Conclusion

More than 10 years had passed since the adoption of the CBMD on 26 October 2005. This period of time allows us to critically evaluate the effects of the CBMD and to assess the experience from its implementation. After the adoption of the CBMD, all Member States allow cross-border mergers of limited liability companies, which changed completely the previous landscape of national prohibitions or unavailability of the cross-border merger mechanisms. The CBMD has both advantages and disadvantages. The advantages of the CBMD facilitate M&As activity in the internal market. Although the CBMD is characterized by many deficiencies, at least EU has a harmonizing legal instrument for cross-border mergers. Many of these deficiencies were discussed extensively and certain solutions to these problems were proposed. These deficiencies concern not only the protection of stakeholders (creditors, minority shareholders and employees), but also the process of the cross-border merger (e.g. scope, available company types, cash payment, pre-merger certificate, scrutiny of the legality of the cross-border merger, consequences, etc.). Despite its disadvantages, this harmonizing legal instrument constitutes a clear, predictable and consolidated framework, which enhances legal certainty and facilitates complex crossborder transactions.159 The main benefit of the CBMD is that cross-border mergers are possible in all Member States. More specifically, it ensures that cross-border mergers are now possible in Member States with previous prohibitions for cross-border mergers or without any previous specific rules on cross-border mergers, and more effective in Member States with previous rules on cross-border mergers.160 The experiences from the transposition of the CBMD reveal certain difficulties and disadvantages. The Study spotted these difficulties and disadvantages by scrutinizing the relevant provisions of the directive. Certain solutions were proposed. It remains to be seen whether and to what extent the Proposal for a Directive as regards cross-border conversions, mergers and divisions will be adopted. The adoption of the relevant reforms regarding cross-border mergers would significantly affect the landscape for M&As at EU level. Although the CBMD is characterized by many deficiencies, the mere existence of an EU harmonizing legal instrument for cross-border mergers should not be underestimated. It is well-known that the adoption of the CBMD was not an easy task, because it required many political compromises. The CBMD

158

Enriques (2014), p. 220. Truli (2016), p. 21. 160 Truli (2016), p. 24. 159

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constitutes an initial harmonizing effort, which could be subsequently developed and enhanced. Acknowledgement This research is financed by the Republic of Cyprus through the Research Promotion Foundation (Research Project: “Takeovers and Mergers in European, Cypriot and Greek Company Law” KOULTOURA//ΒΡ-ΝΕ/0514/18).

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Thomas Papadopoulos is an Assistant Professor of Business Law at the Department of Law of the University of Cyprus. He received a degree of DPhil in Law (2010), a degree of MPhil in Law (2007) and a degree of Magister Juris-MJur (2006) from the Faculty of Law, University of Oxford, UK. He also received his LLB with Distinction (ranked 1st) from the Department of Law, Aristotle University of Thessaloniki, Greece (2005). Previously, he was a visiting researcher at Harvard Law School (2009–2010). He is also a Visiting Professor at International Hellenic University and an Attorney at law (Greece). Moreover, he is an Editorial Secretary of European Company Law (ECL) Journal. He was awarded the “Cyprus Research Award-Young Researcher (2014)” of the Research Promotion Foundation of the Republic of Cyprus (category of ‘Social Sciences & Humanities’). This distinction was awarded on the basis of his research on Takeovers and Mergers and was accompanied by a research grant. He is the Project Coordinator of the Research Project “Takeovers and Mergers in European, Cypriot and Greek Company Law”, which is financed by the Research Promotion Foundation of the Republic of Cyprus. His articles were published in many top international law journals.

An Empirical Research on Cross-Border Mergers at EU Level Thomas Biermeyer and Marcus Meyer

1 Introduction One of the fundamental freedoms introduced by the Treaty of Rome has been the freedom of establishment for companies to move and conduct business throughout the EU. In this regard, a corner stone has been the introduction of the European Single Market following the signing of the Maastricht Treaty in 1992, which promoted a deepening of mobility for companies within the Single Market. Since then, the EU legislator has introduced major legislative acts, such as the through Directive 2005/56/EC1 (hereinafter the “Cross-Border Mergers Directive”) and Council Regulation 2157/20012 (hereinafter the “SE Regulation”) supporting cross-border corporate mobility. In addition, different proposals are discussed on the European level (and the national level) to introduce further legislation in this area. Further to this, the Court of Justice of the European Union (CJEU) has had a

This Chapter is a revised version of Biermeyer and Meyer (2018). 1 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. The Directive is not in force anymore. It has been incorporated into Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. 2 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE).

T. Biermeyer · M. Meyer (*) Maastricht University, Faculty of Law, Maastricht, The Netherlands e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_2

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crucial impact with cases such as SEVIC,3 Cartesio,4 Vale5 or Polbud,6 obliging Member States to allow company mobility within certain limits. In that respect, one point is important in the legislative discussions on crossborder corporate mobility: solid evidence as to the state of corporate mobility in the EU. Such evidence is crucial for an evidence-based approach to legislation, for example in order to determine the risk for stakeholders and the need to provide protective legislation for them. Without such data, a policy debate amongst academics, practitioners and policy-makers is difficult. In respect to cross-border mergers, data had already been gathered for the years 2008–2012 by the study on the Cross-Border Merger Directive carried out by the authors of this Chapter together with the international policy consultancy Lexidale and the Nordic law firm Bech-Bruun for the European Commission.7 This Chapter will provide a first overview of empirical data gathered within the Cross-Border Mobility in the EU project (the “Project”) in respect to cross-border mergers for the years 2013–2017 (hereinafter also “CBMs”). While this Chapter covers a range of matters in relation to cross-border mergers, the Chapter nevertheless has its limits. The findings are based on transactions that were collected from 9 out of 31 registries of EU/EEA Member States.8 The countries that are covered in this Report are: Austria, Finland, France, Germany, Italy, Luxembourg, Netherlands, Spain and the United Kingdom. It is also noteworthy that the timeframe covered per country varies and additional transactions and information still need to be collected. It is only at the end of the Project that a full picture for all EU/EEA Member States for the entire period can be provided. These results should therefore be treated as a preliminary overview and therefore they do not yet represent a comprehensive overview of cross-border corporate mobility within the EU.

3

Case C-411/03 SEVIC, ECLI:EU:C:2005:762. Case C-210/06 Cartesio, ECLI:EU:C:2008:723. 5 Case C 378/10 VALE Építési, ECLI:EU:C:2012:440. 6 Case C-106/16 Polbud - Wykonawstwo sp. z o.o, ECLI:EU:C:2017:804. 7 Biermeyer (2013). 8 The starting point is the coverage of larger EU Member States, so as to collect as many transactions as possible; the transactions therefore cover more than the 10 Member States, despite the fact that additional transactions will be added once all EU/EEA Member States have been researched. 4

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2 Legal Framework Cross-Border Mergers are primarily governed by the Cross-border Mergers Directive as well as by the respective national transposing acts, which have harmonised the legislation on CBMs within the EU.9 It is acknowledged that CBMs are also governed by Article 49 TFEU and its interpretation by case-law, such as SEVIC, directly. Moreover, cross-border mergers can also take place within the context of the formation of a Societas Europaea.

3 Methodology This Chapter focuses on cross-border mergers as collected for the Cross-Border Mobility in the EU project and for this reason it is based on the same methodology as set out below.

3.1

General Methodology of the Project

The Project envisages a monitoring and data collection exercise for the purposes of analysing cross-border company mobility within the EU. The monitoring includes: – European company law forms (SE and SCE); and – Cross-border company mobility instruments (cross-border mergers, cross-border seat transfers and cross-border divisions). With regards to cross-border seat transfers, it should be stressed that the Project only examines cross-border transfers of the registered office of a company and not the cross-border transfer of the central administration. The Project is carried out for companies that are registered in the European Economic Area and for a time span between 2000 and 2020. In order to obtain the necessary data, the methodology focuses on the monitoring of the company registries and the official journals of all EU/EEA countries. This methodology is chosen for the simple reason that cross-border mergers, seat transfers, divisions, formations of European company law forms and similar measures are published in (at least one) national official journal. For cases in which one of these cross-border instruments is used, additional company information is collected, which is necessary in order to accurately describe the transaction and the companies (or company in the case of a seat transfer or SE) involved. 9 For an overview of the transposing acts for the Cross-Border Merger Directive, see: Van Gerven (2010, 2011) as well as Biermeyer (2013).

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All cross-border transactions are subsequently checked via Orbis for the relevant information on the companies as well as to check for potential employee participation issues based on national thresholds for employee participation. Moreover, each transaction is verified in the respective company register (i.e., notices of deletion from the registries) in order to ensure that the cross-border transaction has indeed taken place.

3.2

Limitation of the Scope of the Chapter

For the reason that this empirical data collected for cross-border mergers is based on the research that was conducted during the first nine months of the Project, its scope is more limited as a consequence. Regarding CBMs, the collected data is limited both geographically and temporally. Overall, data pertaining to CBMs have so far been collected between 1 January 2013 to June 2017 and on the basis of the official journals of the following countries with the following individual time periods: – – – – – – – – –

Austria (01.01.2013–31.12.2013); Finland (01.01.2014–31.12.2016); France (01.01.2013–01.07.2017); Germany (01.01.2013–01.06.2017); Italy (01.01.2015–01.09.2017); Luxembourg (01.01.2017–01.06.2017); Netherlands (01.01.2013–01.06.2017); Spain (01.01.2013–31.12.2014); and United Kingdom (01.01.2013–01.06.2017)

For this reason, it must be stressed that the results that are reported in Sect. 4 only provide a picture on the basis of the data that have been collected for such countries. Follow-up publications will complement the data with the missing countries, time periods and additional information.

3.3

Further Methodological Points As to This Report

It should be noted that all figures, maps and observations are based on a specific number of transactions, which is provided underneath each figure or map as “N ¼ [number of transactions]”. In that respect it should be noted that a transaction equals a CBM or a CBST. For CBMs, it should further be noted that for the dataset on which this Report is based, multi-mergers are counted as several individual mergers for each individual merging company involved in the transaction with the acquiring company (hereinafter “MCs”). For example, if 4 MCs merge into one acquiring

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company (hereinafter “AC”), the dataset will contain 4 mergers with the AC and it is indicated in a separate sheet which then shows that a multi-merger has taken place. Linguistically, and in order for it to be more reader friendly, this Report refers to companies with different nationalities, for example a French or an Italian company. It should be noted that this refers to a company being governed, for company law purposes, by the laws of such country.

4 Results 4.1 4.1.1

Cross-Border Mergers: General Overview Number of Cross-Border Mergers Per Year

Up until the time of writing, 1163 CBMs were collected and could be verified between 2013 and 2017, compared to 1227 CMBs that were presented in the Study on the Cross-Border Merger Directive that was commissioned by the European Commission for the period 2008–2012 and which was published in 2013.10 However, as was noted in the section on this Report’s methodology, the current dataset only consists of data from Austria (2013), Finland (2014–2016), France (2013–2017), Germany (2013–2017), Italy (2015–2017), the Netherlands (2013–2017), Spain (2013–2014) and the United Kingdom (2013–2017). The post-2012 data that were collected show 304 CBMs for 2013, 245 CBMs for 2014, 176 CBMs for 2015, 346 CBMs for 2016 and 92 CBMs for 2017. Such numbers should increase in follow-up reports, in which additional countries will be added. Moreover the collection period for 2017 will expand as it only took into account the first 6 months and, at the time of writing, a number of CBMs are still in progress. For this reason it seems likely that more CBMs will have taken place in the 2013 and 2017 period compared to the 2008–2012 period given that only 9 out of 31 countries have been covered so far. Moreover, it also seems likely that 2016 will have been the year with the highest number of CBMs during the period of 2008–2017. In relation to the year 2017, it should be stressed that the number should substantially increase as data were only collected for the first 6 months and many CBMs were still ongoing and therefore they have not yet been included in this Report (Fig. 1).

10

Biermeyer (2013).

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T. Biermeyer and M. Meyer

Number of CBMs (2008-2017)

361

346

332 304 245 194

208 176

132 92

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017*

Fig. 1 Number of CBMs per year; 2008–2012 data based on Study on Cross-Border Merger Directive (orange) (N ¼ 1227); 2013–2017 (June) data based on transactions collected by the Project (blue) (N ¼ 1163)

4.2

Cross-Border Mergers: CBMs Per Country (Aggregated)

In this section, the aggregated number of CBMs per Member State as well as the number of acquiring versus merging companies located in a Member State will be examined.

4.2.1

Total Number of CBMs Per Member State

Figure 2 (below) shows that companies governed by the laws of the Netherlands were most often involved in CBMs and were involved in 492 out of a total of 1163 transactions that were collected for the 2013–2017 period.11 The country with the second highest number of CBMs is Germany, with 488 companies having been involved in a CBM. Other countries with high absolute numbers of CBMs include Luxembourg (265), France (173), Austria (165), the UK (151) and Italy (141). Companies from Eastern and Southern European Member States also participated in CBMs a total of five or less times in the following countries: Latvia (4), Romania

11

Both acquiring and merging companies are counted, with an aggregated total above 100%.

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Fig. 2 Aggregated number of CBMs in EU/EEA per Member State (both ACs and MCs combined) (N ¼ 1163)

(4), Greece (3), Estonia (2), Bulgaria (2), Lithuania (1) and Croatia (1).12 There were no transactions that involved Icelandic or Slovenian companies.

4.2.2

Acquiring Companies Per Country

Figure 3 presents the number of CBMs per country, in which that country’s company was the acquiring company (entry cases). Germany hosted the most ACs (257), followed by the Netherlands (226). Other countries with many acquiring companies were Luxembourg (174), France (90), Italy (84), Austria (75) and the UK (44). More than half of the Luxembourg companies in CBMs were ACs (174 out of 265). This was also the case with German companies (257 out of 488), as well as with Italian (84 out of 141), French (90 out of 173), Finish (40 out of 47), Spanish (29 out of 48), Maltese (8 out of 13), Latvian (4 out of 4), Estonian (2 out of 2) and Bulgarian companies (2 out of 2). This means that these countries can be regarded as

12 However, please note that as was mentioned in the methodology section, data were not yet collected from the official journals of such countries and therefore the actual number may be higher.

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Fig. 3 ACs in CBMs per EU Member State (N ¼ 1163)

‘net recipient countries’. The countries for which the contrary is the case are referred to throughout this Report as ‘net sending countries’.

4.2.3

Merging Companies Per Country

Figure 4 shows the number of CBMs per country, in which that country’s company was the merging company (exit cases). The highest number of MCs can be seen in the Netherlands (266), followed by Germany (231), the UK (107), Luxembourg (91), Austria (90), France (83) and Italy (57). The Netherlands, furthermore, had more MCs than it had ACs (266 out of 492) and therefore it can be regarded as a ‘net sending country’. This means that more companies left the Netherlands than there were companies that merged with Dutch companies. The same phenomena is also salient in other countries, most notably in the UK, where more than two thirds of companies (107 out of 151) merged with non-UK companies. In Cyprus, more than three quarters of companies (29 out of 37) were MCs.

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Fig. 4 MCs in CBMs per EU Member State (N ¼ 1163)

4.3

Cross-Border Mergers: Company Form of All Companies Involved in CBMs

This Report also examines which legal company forms are most typically engaged in CBMs. The respective company forms provided by national laws were classified into the following four groups for the purposes of this Report: private limited liability companies (hereinafter “private LLCs”), public limited liability companies (hereinafter “public LLCs”), SEs and other (including, among others, investment funds, cooperative companies or partnerships). Figures 5, 6 and 7 below present the company forms that were involved in crossborder transactions and that are subsequently covered by this Report respectively. AC and MC company forms represent similar trends with around three-quarters of private LLCs for ACs, and around one-quarter of public LLCs in both scenarios above. There tends to be more private LLCs among MCs (78%) than ACs (69%). On the other hand, a reverse trend is visible for public LLCs, as those company forms accounted for 28% of all ACs and for only 21% of all MCs. Another difference between company forms of ACs and MCs can be observed in cases involving European companies. Twelve SEs acted as ACs, whereas only one was on the

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Company form of all companies involved in CBMs (AC and MC) Other, 31

SE, 13

Public LLC, 575

Private LLC, 1705 Public LLC

Private LLC

SE

Other

Fig. 5 Pie chart of company form of all companies involved in CBMs (ACs + MCs) (N ¼ 2324)

Company form ACs Other, 21

SE, 12

Public LLC, 328

Private LLC, 801 Public LLC

Private LLC

SE

Other

Fig. 6 Pie chart company form ACs involved in CBMs (N ¼ 1162)

merging side of reported transactions. Overall, very few SEs or ‘other’ company forms participated in CBMs, accounting for 2% of the overall number of cases. The above-mentioned conclusions could also be observed in relation to frequencies of company form combinations, which are presented below in Fig. 8. By far the most frequent combination was a CBM between two private LLCs (697 cases) which accounted for 60.03% of the reported transactions. One hundred and ninety transactions where public LLCs merged with a private LLC were identified, making it the second most often occurring combination (16.37%). Other transaction types worth noting are those between two public LLCs (133 cases, 11.46%) and private LLCs with public LLCs (100 cases, 8.61%). The influence of the rest of the possible combinations in reported transactions was marginal, as none of them accounted for more than 1% of the total number of reported cross-border mergers.

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Company form MCs Other, 10

SE, 1

Public LLC, 247

Private LLC, 904 Public LLC

Private LLC

SE

Other

Fig. 7 Pie chart company form MCs involved in CBMs (N ¼ 1162)

Company forms of AC and MC involved in CBMs (2013-2017) Private LLC-Private LLC

697

Public LLC-Private LLC

190

Public LLC-Public LLC

133

Private LLC-Public LLC

100

Other-Public LLC

8

Other-Private LLC

12

SE-Public LLC

6

SE-Private LLC

5

Public LLC-Other

5

Private LLC-Other

3

SE-SE

1

Other-Other

1

Public LLC-SE

0

Private LLC-SE

0 0

100

200

300

400

500

Fig. 8 Frequencies of the recorded combinations in CBMs (N ¼ 1161)

600

700

800

46

T. Biermeyer and M. Meyer Table of sectors of activity ACs (CBMs 2013-2017)

A - Agriculture, Forestry and Fishing

2

B - Mining and quarrying

11

C - Manufacturing

58

D - Electricity, gas, steam and air conditioning supply

6

E - Water supply; sewerage, waste management and… 0 F - Construction

4

G - Wholesale and retail trade; repair of motorvehicles…

132

H - Transportation and storage

13

I - Accomodation and food service

1

J - Information and communication

24

K - Financial and insurance activities

249

L - Real estate

66

M - Professional, scientific and technical activities

80

N - Administrative and support service activities

71

O - Public administration and defence; compulsory… 0 P - Education

1

Q - Human health and social work activities

0

R - Arts, entertainment and recreation

1

S - Other service activities

7

T - Activities of households as employers;… 0 U - Activities of extraterritorial organisations and bodies

0 0

50

100

150

200

250

300

Fig. 9 Sectors of activity (N ¼ 726) (No data are yet available for 437 cases)

4.4

Cross-Border Mergers: Field of Activity ACs

Reported transactions were also monitored based on the business activity that was conducted by ACs. Figure 9 above presents the reported transactions according to NACE codes. Throughout the 2013–2017 period, a total of 249 transactions, where the AC was active in ‘financial and insurance activities’ NACE code, were identified. Nevertheless, the majority of those companies are not active in the financial sector as it is generally understood. In the identified group, 164 out of 249 transactions concerned an AC as a holding company (NACE code 6420), which can explain why a significant number of ACs choose to conduct their business activities within section K of the NACE statistical classification. It indicates that cross-border transactions were very often structured so as to involve holding companies merging for their respective corporate groups. Deals where the AC was engaged in an activity covered by Section ‘M – Professional, scientific and technical activities’, included a significant number of transactions where the AC fell within NACE code 7010 representing

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Multi-CBMs 2013-2017*

Multi-CBMs, 225, 19%

Regular CBMs, 938, 81%

Fig. 10 Overview of multi-CBMs found between 2013 and 2017 (N ¼ 1163)

head office activities. A total of 40 out of the 80 transactions reported in Section M, involved an AC acting as a head office within the meaning of code 7010. It can be further inferred, based on the collected data, that CBMs are popular among companies that are engaged in the wholesale and retail trade (132 transactions) as well as among real estate companies (66 transactions) and in the manufacturing sector (58 transactions).

4.5

Cross-Border Mergers: Multi-Mergers

As can be seen from Fig. 10 above, 19% of the CBMs involved more than two companies and are thus qualified as multi-CBMs. The remainder of the transactions concerned ‘regular’ cross-border mergers, which involved only one acquiring and one merging company.

4.6

Cross-Border Mergers: Employee Numbers

The figures in this section show the number of employees of MCs and ACs that are involved in CBMs for the 2013–2017 period. It should be noted that for 627 ACs and 693 MCs, there were no data available, which represents 54% of all ACs and 60% of MCs.13 With regard to companies that have employees, the largest number of cases are in the range of 1–5 employees with 175 ACs (15%) and 276 MCs (24%). These figures show that overall MCs participating in a merger have more often fewer employees compared to ACs. 13 This large fraction of cases where no data are available through the Orbis database will be subject to further analysis and will likely change in subsequent reports.

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T. Biermeyer and M. Meyer Employee data for companies involved in CBMs (2013-2017)

800 700

693 627

600 500 400

276

300

175

200

104 91

100

35 18

12 11

57

79 19

34

9

20 13

32

6

13

0 n.a.

0

1-5

6-50

51-100 AC

101-300

301-500 501-1000 1001-2000

>2000

MC

Fig. 11 Employee figures for acquiring and merging companies in CBMs compared; in number of cases (N ¼ 2.324)

The second largest share of cases concern companies, which have between 6 and 50 employees with 91 ACs (8%) and 104 MCs (9%). Here the net difference between AC and MC companies is minimal, with a difference of only 13 cases (Fig. 11). This difference changes for the rest of the chart with more ACs than MCs being represented in the categories, which means that large companies involved in CBMs are more commonly ACs. The biggest difference can be observed for cases with companies having between 101 and 300 employees, in which the net difference is 38 (57 ACs and 19 MCs), and businesses with more than 2000 employees, as in those cases the net difference is 66 (79 ACs and 13 MCs). Acquiring companies which have more than 2000 employees represent 7% of the sample, whereas merging companies with more than 2000 employees represent only 1% of the sample. The smallest differences can be observed in relation to those companies with 501–1000 employees, whereby the numbers of ACs and MCs is almost the same (20 ACs and 13 MCs respectively). Overall, it can be concluded that a larger number of small companies with 50 employees or less are typically merging companies in a CBM, whereas in the category of 51 or more employees it is the case that there are more acquiring companies (Figs. 12 and 13).

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Employee categories: CBM - ACs (2013-2017) 501-1000 1%

>2000 7%

1001-2000 3%

301-500 3% 101-300 5% 51-100 3% n.a. 54%

6-50 8%

1-5 15% 0 1%

Fig. 12 Employee figures for acquiring companies in CBMs compared; in number of cases (N ¼ 1162)

Employee categories: CBM - MCs (2013-2017) 101-300 2%

301-500 501-1000 1% 1%

1001-2000 0% >2000 1%

51-100 1% 6-50 9%

n.a. 60%

1-5 24% 0 1%

Fig. 13 Employee figures for merging companies in CBMs compared; in number of cases (N ¼ 1162)

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5 Conclusion As a conclusion the following can be stated. Also for the period 2013–2017, a robust number of cross-border mergers could be found, in total 1163 compared to 1227 CMBs that were presented in the Study on the Cross-Border Merger Directive that was commissioned by the European Commission for the period 2008–2012 and which was published in 2013.14 For the reason that not yet all Member States data has been collected for the period 2013–2017, the overall number of cross-border mergers will likely be higher in such period compared to 2008–2012. Based on the collected data, for the period 2013–2017, Germany hosted the most ACs (257), followed by the Netherlands (226). Other countries with many acquiring companies were Luxembourg (174), France (90), Italy (84), Austria (75) and the UK (44). The highest number of merging can be seen in the Netherlands (266), followed by Germany (231), the UK (107), Luxembourg (91), Austria (90), France (83) and Italy (57). The data also shows that there is a predominant trend that the companies involved in cross-border mergers are private limited liability companies, followed by public limited liabilities. Moreover, in respect of the field of activity of the companies on the basis of the NACE code, the highest number of companies were active in the financial and insurance activities field. Such field however includes the activities of the head office of a company. Other important fields that have been observed were wholesale and retail trade, professional, scientific and technical activities, administrative and support service activities as well as manufacturing. The collected data also shows that roughly below one fifth of the CBMs are multicross-border mergers, thus involving more than two companies. The data, finally, also shows that most cross-border mergers involve legal entities with a low number of employees. As a final concluding point, the Chapter shows that there is still a lot of work to be done until a full picture on empirical data on cross-border mergers, and cross-border mobility in general, can be provided. The authors of this Chapter are looking forward to providing further updates on this topic!

References Biermeyer T (2013) Study on the cross-border merger directive. European Commission. Available via Publications Office of the European Union. https://publications.europa.eu/en/publicationdetail/-/publication/0291c60a-df7a-11e5-8fea-01aa75ed71a1# Biermeyer T, Meyer M (2018) Cross-border corporate mobility in the EU: empirical findings 2017. Available via SSRN: https://ssrn.com/abstract¼3116042 Case C 378/10 VALE Építési, ECLI:EU:C:2012:440 14

Biermeyer (2013).

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Case C-106/16 Polbud - Wykonawstwo sp. z o.o, ECLI:EU:C:2017:804 Case C-210/06 Cartesio, ECLI:EU:C2008:723 Case C-411/03 SEVIC, ECLI:EU:C:2005:762 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE) Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies Van Gerven D (ed) (2010) Cross-border mergers in Europe: Volume I. Cambridge University Press, Cambridge Van Gerven D (ed) (2011) Cross-border mergers in Europe: Volume II. Cambridge University Press, Cambridge

Thomas Biermeyer is an Assistant Professor at Maastricht University (The Netherlands) as well as a Senior Associate at the law firm Wildgen in Luxembourg. His research as well as his practice focus on cross-border corporate transactions, such as cross-border mergers or seat transfers as well as corporate finance law matters. He has written his dissertation on stakeholder protection in crossborder company seat transfers. Thomas has led amongst others the European Commission study on the application of the cross-border merger directive and is together with Marcus Meyer the project leader of the ‘Cross-border Corporate Mobility project’, which is financed by the European Trade Union Institute and a Jean Monnet grant. Marcus Meyer is an Assistant Professor at Maastricht University (The Netherlands). His primary research focus is on employee participation issues in multinational corporations, both under national and EU law. He has written his dissertation on the position of Dutch works councils in multinational corporations, which he defended in April 2018. His research is primarily of an empirical nature and focuses both on quantitative as well as qualitative legal research. Having participated in a number of research projects on cross-border mergers, he also has a strong interest in corporate governance issues. Marcus is the project leader of the ‘Cross-border Corporate Mobility project’ together with dr. Thomas Biermeyer, which is financed by the European Trade Union Institute and a Jean Monnet grant.

Cross-Border Mergers and Reincorporations in the EU: An Essay on the Uncertain Features of Companies’ Mobility Federico M. Mucciarelli

1 On Legal Entities and the Law Companies are not created just by virtue of contracts and their very existence requires the intervention of a legal system that accepts the presence of a ‘legal person’ separated from their members. This conclusion is made clear by considering the historical development of modern companies. In the old ‘concession system’, which was the first mechanism for incorporating new legal entities in the modern era, companies were created by a unilateral charter granted by the monarch or by official public authorities.1 During the Nineteenth Century, most Western legal systems moved away from this logic, and accepted the idea that individuals can incorporate new companies, provided that they respect specific legal provisions. And yet, what is clear is that companies exist only when a sovereign authority recognizes the new legal entity, which, differently from human being, is not made of blood and flesh, but of law. This situation was plastically summarized by the European Court of Justice, which famously stated that ‘[c]ompanies are creatures of the law and, in the present state of Community law, creatures of national law’.2 In this context, however, the question arises of whether companies are bound to their jurisdiction of origin like an unavoidable fate. In common law, the answer is notoriously in the negative; in a famous case, in particular, Macnaghten J stressed that ‘[t]he domicile of origin, or the domicile of birth, using with respect to a

1

See Davies (1997), p. 20. C-81/87, The Queen v HM Treasury and Commissioners for Inland Revenue, ex parte Daily Mail and General Trust plc [1988] ECR 5483, at 19. 2

F. M. Mucciarelli (*) University of Modena and Reggio Emilia, Modena, Italy SOAS, University of London, London, UK e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_3

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company a familiar metaphor, clings to it throughout its existence’.3 In globalized economies, however, the capital seeks to free itself from the laces of local law, hence the question arises as to whether, and under which conditions, companies originally incorporated under the law of a given country can change applicable law or merge with companies incorporated under other jurisdictions, without the need of liquidating all assets. In both cases (re-registration under the law of another country or merger into a company of other country) what is being changed is the State having law-making power with regard to the internal affairs of the company and other strictly related issues that are normally collapsed into the notion of ‘company law’. Companies’ headquarters, assets, businesses or any other physical elements, however, might well continue to be placed where they were before, provided that the involved countries accept this outcome. Why should companies be interested in changing the jurisdiction that govern their internal affairs? And, most importantly: should companies be given this possibility at all? The optimistic answer is that by re-registering under a different jurisdiction, companies would select the country that offers the best-tailored rules, which would ultimately increase the overall efficiency.4 A more skeptical view, however, holds that companies seek the jurisdiction that offers the most relaxed rules, which would not necessarily increase productivity or efficiency.5 Another question is whether states do really have incentives to ‘compete’ for attracting midstream reincorporations. Given the fact that companies’ tax residence does not coincide necessarily with their registered office, no tax-related incentive should—at least in theory—exist. Whatever answer we prefer regarding these general questions, under a legal standpoint companies should necessarily follow certain steps in order to reincorporate under a different law, provided the involved jurisdictions allow this outcome. A successful reincorporation, indeed, requires the company to be registered in the company or commercial register of the jurisdiction of arrival as a continuation of the formerly existing company (not as a new company) and that the same company is cancelled from the register of the original jurisdiction without going through a liquidation or winding-up procedure. This is why these transactions are often classified in the European Union as ‘transfers of registered office’. Such a shift is normally triggered by a decision taken by the company to alter the clause in its articles of association indicating its ‘registered office’ or ‘statutory seat’. In this regard, the jurisdictions involved might either ban any relocations abroad of companies’ registered office, or require companies to shift physical elements (such as the headquarter or a ‘real’ establishment) from the territory of one state into another, or, eventually, accept cross-border reincorporations and regulate them.

3

Gasque v Inland revenue commissioners [1940] 2 KB 80, 84. See the seminal papers of: Winter (1977) and Romano (1985). 5 See for instance: Latty (1955) and Cary (1974). 4

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2 Reincorporations in the EU Member States of the European Union have followed a random walk with regard to companies’ private international rules and companies’ re-registrations from one State to another. In this regard, it is worth mentioning that a first strategy for reincorporating from one country to another is by using the ‘vehicle’ of a Societas Europaea, or European Company. SEs can indeed relocate their registered office from one country to another6 and such relocation also triggers a shift of the jurisdiction having residual law-making power over that company.7 The only limitation is that SEs can only relocate their registered office if they also shift their headquarter into the new jurisdiction.8 This was a sort of necessary compromise between the incorporation and the real seat theories that only made the approval of the SE Regulation possible. Much more controversial is the issue of whether companies can directly relocate their registration across EU Member States and change jurisdiction without liquidation.9 In this regard, the Court of Justice of the European Union has recently clarified that the EU freedom of establishment also covers companies’ right to re-register throughout the EU. This ‘liberal’ stream of CJEU’s case law, which partially departed from previous decisions that were more uncertain in this regard, was initiated in 2008, when the Court maintained that the freedom of establishment also implies the right to reincorporate under the law of a different country.10 This statement, however, was not strictly necessary to decide the merit of the case and it has been mainly considered as an obiter dictum without binding force. In a subsequent decision from 2012, the Court held that the freedom of establishment covers inbound re-incorporations and that restrictions should be justified by reasons in the public interest, and that they should be appropriate and proportionate to attain their purposes11; additionally, it was clarified that Member states should comply with the principles of equivalence and effectiveness, hence a reincorporation can not be banned or made impossible if domestic companies can convert into other company types. Eventually, a decision issued in 2017 has clarified that ‘outbound’ reincorporations are also protected by the freedom of establishment12; therefore, a duty to liquidate companies’ assets in order to reincorporate under the law of another Member State is a restriction to the freedom of establishment, which should be justified by the aim of attaining overwhelming goals in the public interests, provided that it is appropriate and proportionate to attain such goals; a duty to liquidate the Regulation of the Council 2157/2001/EC (hereinafter ‘SE Regulation’), article 8. SE Regulation, article 9(1)(c)(iii). 8 SE Regulation, art. 7. 9 A comprehensive analysis in Gerner-Beuerle et al. (2018). On the freedom of establishment in general see De Luca (2017), pp. 85–103. 10 C- 210/06 Cartesio Oktato es Szolgaltato bt [2008] ECR I-9641 (ECLI:EU:C:2008:723). 11 C-378/10 VALE Építési kft. [2012] (ECLI:EU:C:2012:440). 12 C-106/16 Polbud v Wykonawstwo sp. z.o.o [2017] (ECLI:EU:C:2017:804). 6 7

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company’s assets, however, is never justified, as less restrictive measures always exist to attain the same goals. Despite the case law of the European Court of Justice, lacking any harmonising measures at the moment only some member states allow cross-border re-incorporations by way of relocation of registered office, while many other either do not regulate this transaction or outright ban the relocation of registered office.13

3 Cross-Border Mergers As Vehicles for Reincorporations In this uncertain scenario, however, companies have a different mechanism at disposal to attain the same goal, namely entering into a cross-border merger: a company that aim at re-registering under the law of a different jurisdiction without liquidation can incorporate a new wholly owned subsidiary in the ‘target’ State and then merge into it; in practice, the outcome is that the company is reincorporated into the Member State of the subsidiary. Cross-border reincorporations were liberalized in 2005 through a directive14 and an almost contemporary decision of the European Court of Justice, which clarified that these transactions are protected by the freedom of establishment.15 The foremost example of the use of a cross-border mergers as a vehicle for reincorporations was the transfer of the holding company of the car manufacturing group ‘FIAT’ from Italy to the Netherland. Such a result was attained by merging the Italian holding company (FIAT s.p.a.) into a newly established Dutch company (Fiat Chrysler Automobiles N.V.), that would serve as holding company for the whole group, including the American subsidiary Chrysler. In practice, the result was that Fiat s.p.a. re-incorporated in the Netherland under the new name of Fiat Chrysler Automotive N.V.16 One of the main reasons that induced Fiat to convert into a Dutch company was that the company regime of the Netherland allows loyalty shares and multiple voting shares, which were not foreseen by Italian company law at the time of the merger. In this regard, it is worth mentioning that immediately after the completion of the merger, Italian company law rules were amended to include both multiple voting shares and loyalty shares.17

13

See Gerner-Beuerle et al. (2018), pp. 6–8. Directive 2005/56/CE of the European parliament and the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ 2005, L 310/1 (hereinafter the ‘Cross Border Merger Directive’). This directive was eventually codified through with Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (codification) (hereinafter the ‘Directive 2017/1132’). 15 C-411/03 Sevic Systems [2005] ECR I-10805 (ECLI:EU:C:2005:762). See Siems (2004–2005) 167; Bech-Bruun Lexidale (2013), p. 30. 16 Pernazza (2017), p. 40. 17 Article 2351 Civil Code and article 127-quinquies of legislative Decree 58/1998. See Lamandini (2015), p. 490; Ventoruzzo (2015). 14

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The reason why a cross-border merger was used to attain this goal is to be found in the uncertain contours of Italian law with regard to cross-border reincorporations; although Italian companies can decide with supermajority voting to relocate their statutory seat abroad,18 and absent or dissenting shareholders have a right to withdraw from the company after such a decision is taken,19 it is not clear whether this decision can lead to a re-registration under the law of the target country and what procedural steps are to be followed to attain this goal.20 Cross-border mergers, by contrast, are clearly regulated by the Directive and the Italian implementation provisions, which design a common procedural framework and, therefore, a certain degree of legal predictability exists. In particular, the directive and the national implementing measures clarify the procedure for cancelling the company from the original register, coordinate such cancellation with the registration in the country of arrival and clarify that such mergers should be tax-neutral like domestic mergers. With regard to the use of cross-border mergers as vehicles for attaining a relocation of a company’s registered office and its reincorporation in the target jurisdiction, it is necessary to assess whether the procedural steps indicated in the directive are easily available for companies that aim at relocating their registered office and reincorporating in the target jurisdiction. When a company, such as FIAT s.p.a., aims at using a cross-border merger as vehicle for reincorporation, the following steps are to be implemented: (a) a ‘shell’ company should be incorporated in the new jurisdiction; (b) the company should draw up a draft term of the merger21; (c) the company should make such terms of merger publicly available in accordance with national rule22; (d) the company should publish in the National Gazette the essential elements of the transaction (if required by domestic law)23; (e) the board of directors and an independent expert should draw up a business report and a financial report24; (f) the transaction should be approved by the general meeting of shareholders25; (g) the transaction and the documents should be submitted to judicial or notary supervision26; (h) creditor protection mechanisms should be respected; (i) eventually, the merger must be published in the register of the incorporating company and the company should be, subsequently, cancelled from the original register. 18

Art. 2369 Civil Code. Article 2347 Civil Code (public companies) and article 2473 Civil Code (private companies). 20 Benedettelli (2010), p. 1264; Mucciarelli (2010), pp. 174–178; Gerner-Beuerle et al. (2018), p. 24. 21 Directive 2017/1132, Article 122 (Cross-Border Mergers Directive, Article 5). 22 Directive 2017/1132, Article 123(1) (Cross-Border Mergers Directive, Article 6(1)). 23 Directive 2017/1132, Article 123(2) (Cross-Border Mergers Directive, Article 6(2)). 24 Directive 2017/1132, Article 124 and Article 125 (Cross-Border Mergers Directive, Article 7 and Article 8). 25 Directive 2017/1132, Article 126 (Cross-Border Mergers Directive Article 9). 26 Directive 2017/1132, Article 127 and Article 128 (Cross-Border Merger Directive, Article 10 (pre-merger scrutiny) and Article 11 (overall scrutiny of the completion of the merger). However, only a minority of Member States require notarization of merger documents: BechBruun Lexidale (2013), p. 57. 19

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In this context, it is relevant to highlight the mechanisms for protecting minority shareholders and creditors. The reason behind the need to protect these classes of stakeholder is the same: after the cross-border merger, the ‘acquired’ company will cease to exist and both shareholders and creditors will be governed by another jurisdiction’s company law regime. Nevertheless, the Cross-Border Merger Directive treats minority shareholders and creditors differently.27 Member States, in particular, can discretionally decide the intensity of minority protection and whether shareholders need to be protected at all. In this regard, the only common denominator among Member States seems to be provided by the Third Directive on domestic mergers, according to which mergers should be approved by supermajorities and by special vote of each class of shares ‘whose right are affected by the transaction’.28 The Italian company law regime, however, provides for a higher standard of protection as compared to domestic mergers, as dissenting or absent shareholders have the right to withdraw from the company.29 Such withdrawal or appraisal rights, however, might increase ex post the cost of the transaction if an excessive number of shareholders decide to leave the company.30 By contrast, creditor protection mechanisms are mandatory, although Member States can decide the intensity of such protection.31 The reason why creditor protection is mandatory is the stakeholder-oriented nature of corporate law in many EU Member States, where the agency problem between shareholders and creditors is, at least in part, bundled with the agency relations between shareholders and the board and between majority and minority shareholders. As a consequence, cross-border mergers and reincorporations might harm creditors who had based their investment decisions upon certain company law rules. Strategies to protect creditors vary from Member State to Member State. In most jurisdictions, companies that enter into a cross-border merger should either provide a security or pay in advance any debts that have not yet fallen due32; in some Member States, creditors are required to file a petition or to raise a judiciary objection against the merger judicially, and the court should assess whether the merger is detrimental to creditors or not.33 Eventually, it is worth mentioning the UK regime, which provides for a strong creditor protection: any creditor of a UK merging company can apply to the

Directive 2017/1132, Article 121(2) (Cross-border Mergers Directive, article 4(2)): ‘A member state may [...] adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger.’ 28 Ventoruzzo (2007), p. 59. 29 Art. 5 Legislative Decree n. 108/2005. 30 Tröger (2005), p. 40; Bech-Bruun Lexidale (2013), p. 48. 31 Directive 2017/1132, Article 122 (Cross-border Mergers Directive Article 4(2)). 32 See Enriques and Gelter (2006), p. 433; Lombardo (2009), p. 647. See also Impact Assessment on the Directive on cross-border transfers of registered office, 12.12.2007 SEC(2007) 1707, 49: a general duty to provide security to creditors ‘would ensure more extensive protection of creditors’ rights but they would add—sometimes unnecessary—financial and time cost to the transfer’. 33 Bech-Bruun Lexidale (2013), p. 35. 27

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court to summon a meeting of creditors, which should approve the merger with a majority in number and 75% in value of creditors represented at the meeting.34 In order to assess whether cross-border mergers are functional equivalent of direct relocations of registered offices, it is useful comparing and contrasting the former with the procedural steps designed in the jurisdictions that explicitly and thoroughly regulate cross-border reincorporations. Such jurisdictions are Cyprus, the Czech Republic, Denmark, Malta and Spain.35 Under the Spanish regime,36 for instance, companies that seek to reincorporate abroad should implement the following steps: (a) a project of relocation and a detailed report should be drafted; (b) the project and the report should be registered in the Commercial Registry and published in the Official Journal of the Commercial Registry; (c) the transaction should be approved by the general meeting of shareholder; (d) creditors have a right to challenge the decision before a Court (like for cross-border mergers); (e) the Spanish Commercial Register issues a certificate which attests the completion of the acts; (f) the transfer is effective from the time when the company is entered in the new register. This procedure is only slightly complicated than the procedure designed by the CrossBorder Merger Directive. Both procedures aim at accommodating the interest of shareholders and creditors, and at designing a neat proceeding for cancelling the company from the original register. One of the main procedural problems in both cases is indeed that the emigrating company is struck off the original register only after its registration in the new jurisdiction; to this aim is necessary to establish some form of official communication between the two registers, and the Cross-Border Merger Directive was an initial step in this direction. To this aim, the Cross-Border Merger Directive was amended in 2012, in order to create the Business Registers Interconnection System (BRIS), which has started its activities in June 2017.37 Eventually, we should mention that the European Parliament has recently approved a new directive that amends the provisions on cross-border mergers and divisions, and introduces a new proceeding for cross-border reincorporations.38 What is interesting to notice is that the new directive introduces a comprehensive proceeding for cross-border reincorporations, which addresses all the practical problems and uncertainties emerged so far by mirroring the proceeding set forth for cross-border mergers and divisions.39 Regarding stakeholder protection, it is to be noticed that the directive bears significant innovations. First of all, minority shareholders are mandatorily protected through a general right to dispose their shares

34

The Companies (Cross-Border Mergers) Regulations, 2007SI 2007/2974, regulation 14. For an overview see: Gerner-Beuerle et al. (2017); Gerner-Beuerle et al. (2019), pp. 144–166. 36 Articles 92 to 103 of the Structural Modification of Companies Act 3/2009. 37 Directive 2012/17/EU Article 2 implemented by Regulation (EU) 2015/884 of 8 June 2015. 38 Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (COM(2018)0241 – C8-0167/2018 – 2018/0114(COD)), approved by the European Parliament on 18.4.2019 (not yet published in the Official Journal). 39 In particular, new Articles 86a to 86u should be introduced in the Directive 2017/1132. 35

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either to the company, or to other shareholders or third parties, in return of ‘adequate cash compensation’.40 Secondly, creditors have the right to apply to a court for adequate safeguard, unless it is proven that no harm is produced by the transaction.41,42

4 Are We Sure That We Mean the Same When We Talk of ‘Merger’? Eventually, I would like to stress a more general problem that may arise from any harmonizing directive, namely that of concealed discrepancies across Member States where nation-specific formants are in action. This issue can not be addressed in general terms in this paper, yet it is interesting to describe the rift existing between German and Italian conceptions of the notion of ‘merger’. For German scholars, the notion of ‘merger’ (Verschmelzung in German)43 refers to the winding up of pre-existing companies, without liquidation, combined with a universal succession of the new company with regard to assets and liabilities of pre-existing companies; as a consequence, shareholders of all merging companies obtain shares in the resulting company.44 This doctrinal construction, which seems to faithfully mirror the legislative text, has several consequences. The first one is that, any public license or authorization related to activities undertaken by a merging company should expire in the wake of the implementation of a merger. Additionally, as a consequence of the universal succession, real estates of the merging company are conveyed to the resulting company, which obviously triggers property taxation.45

40 See Article 86j Directive 2017/1132 for cross-border reincorporations; new Article 126a Directive 2017/1132 for cross-border mergers; new Article 160l Directive 2017/1132 for cross-border divisions. 41 See Article 86k Directive 2017/1132 for cross-border reincorporations; new Article 126b Directive 2017/1132 for cross-border mergers; new Article 160m Directive 2017/1132 for cross-border divisions. 42 On the 17th January 2019 the European Parliament decided to enter into a proceeding of interinstitutional negotiation and eventually approved the final version of the directive on the 18th of April; at the moment when this contribution is being finalised, the directive has not yet been published in the Official Journal and has not been translated into other languages. 43 § 2(1) Transformation Act (Umwandlungsgesetz). 44 Weller (2013), p. 512; Kindler (2015), para 779; Frank (2016), p. 56. 45 Teichmann (2012), p. 2091; Weller (2013), pp. 512–513; Kindler (2016), p. 95. See the German act on taxation of real estate transactions (Grunderwerbssteuergesetz 1982) §6a, which excludes taxation for corporate restructurings (including a merger) only within a group of companies.

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In Italy, by contrast, scholars and courts qualify a ‘merger’ as a reorganization of pre-existing entities,46 which continue their existence in a new shape,47 so that the winding-up of previous entities is just a consequence of this operation.48 This conceptual solution was firstly supported by legal scholars in the wake of the new Civil Code of 1942, which, differently from the previous Commercial Code,49 does not mention mergers among the causes for a company’s winding-up. Eventually, after a company law reform from 2003,50 case law now unanimously accepts that a merger is a mere reorganization of pre-existing entities, which continue their existence in a new shape. As a consequence, mergers do not trigger the taxation of real estates’ transfers from one company to another51; eventually, mergers do not justify contractual partners to withdraw from their contractual relations with merging companies. This doctrinal difference emerged in the case Sevic, in which, as we have seen above, the Court clarified that national prohibitions to cross-border mergers violate freedom of establishment.52 To support the idea that such a prohibition did not infringe EU law, the German government moved from the assumption that a merger implied the dissolution of the involved companies. Therefore, since ‘a dissolved company cannot [. . .] be established either as a primary or secondary place of business in another Member State’, the freedom of establishment did not apply to that specific case.53 The ECJ concluded that this argument was not sufficient to deny a restriction of the freedom of establishment. In particular, according to the ECJ ‘German law establishes a difference in treatment between companies according to

46

The Civil Code does not mention mergers among the causes for a company’s winding-up. Additionally, since 2003 the expression ‘companies involved in a merger’ was replaced by ‘wound-up companies’: Art 2504-bis Civil Code. 47 See Cassazione S.U. 8.2.2006 n. 2637, (2006) Foro Italiano, 1739; Cassazione S.U. 17.9.2010 n. 19698. 48 See: Santagata (1964), pp. 149–154; Ferri (1986), p. 980; Santagata and Santagata (2004), p. 6; Portale (2005), p. 117. 49 Art 189, No 7 Italian Commercial Code 1882. See C Vivante, Trattato di diritto commerciale5, vol. 2 (Milan: 1929) para 765. 50 Legislative Decree n. 6/2003, which amended all provisions of the Italian Civil Code related to companies and cooperatives. 51 See legislative decree n. 131/1986 on taxation of registrations of specific transactions, art 4; legislative decree n. 347/1990, on real estate taxation, art. 10(2) (only a fixed fee of €168 is levied). 52 At that time, the German statute on companies’ transformations, which only mentions mergers between two or more companies having their seat in Germany, was interpreted as an implicit prohibition of cross-border merges (Transformation Act (Umwandlungsgesetz 1995) §1(1)). See H Schaumburg, ‘Grenzüberschreitende Umwandlungen’ GmbH Rundschau (1996) 502; B Großfeld, Internationales Gesellschaftsrecht, in von Staundigers Kommentar BGB (Berlin: 1998) para 699. 53 The arguments of the German Government were reported in the Opinion of the Advocat General Tizzano, delivered on 7 July 2005 (ECLI:EU:C:2005:437) at 22.

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the internal or cross-border nature of the merger’ which is a restriction to the exercise of freedom of establishment.54 Very similar wordings (albeit in different languages) can lead to diverging interpretations and operational rules across Member States. This does not make cross-border mergers unfeasible as a matter of their practical results, yet merging companies can not be reasonably sure of all legal outcomes that their decision shall produce in each of the jurisdictions involved in the operation.

5 Conclusions Cross-border mergers were made feasible in 2005 through the enactment of a specific Directive. In the wake of this directive, companies have been given a relatively neat regulatory framework for merging with other entities incorporated in the EU. Cross-border mergers can also be vehicles for mere reincorporations, when a company establishes a new entity in the target country and merges into it, with the practical result of converting into a company type of the targeted jurisdiction. At a first sight, therefore, the EU regime is in line with the US one, where reincorporations from one state to another are technically feasible through crossborder mergers. Significant differences, however, exist. In the EU, cross-border mergers require a burdensome and time-consuming proceeding. Such a proceeding is necessary to protect the interests of minority shareholders and creditors, and to design a clear procedure for cancelling the company from the original register and re-registering in the register of the target State. Additionally, although the directive simplifies the procedure when the acquired company is wholly owned by the acquiring company,55 there is no ‘fast-track procedure’ for cross-border merger that only aim at relocating the company’s registered office (that is to say the situations in which the acquiring company is wholly owned by the acquired company).56 Additionally, in a cross-border merger several hidden obstacles might emerge, due to the different regulatory frameworks involved and the discrepancies that may arise regarding the required documents or the procedural timing according to the law of the countries involved. Such discrepancies are, to a certain extent, unavoidable as they also hinge upon nation-specific scholarly and judiciary formants. In practical 54 Sevic (nt) at 22. The Advocate General Tizzano opposed the arguments of the German Government as it ‘follows an inverted logic in the sense that it concludes that a consequence of the merger, namely the dissolution of the incorporated company, is the reason why that company is unable (even before it is dissolved!) to carry out the merger and therefore the justification for the prohibition on registration which precisely precludes this operation.’: Opinion Advocat General (nt) at 25. 55 Cross-Border Merger Directive, Article 15(1). 56 Becht-Bruun, Lexidale (2013), p. 112; Schmidt (2016), p. 32.

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terms, differences as to regulatory frameworks and language-specific discrepancies risk to reduce legal certainty and increasing transaction costs. Therefore, crossborder mergers seem to be a suitable vehicle for re-incorporations of big companies, while small enterprises are likely to find this mechanism burdensome or timeconsuming.

References Bech-Bruun Lexidale (2013) Study on the application of the cross-border merger directive Benedettelli M (2010) Sul trasferimento della sede sociale all’estero. Rivista delle società 55:1264 Cary WL (1974) Federalism and corporate law: reflections upon delaware. Yale Law J 83:663 Davies PL (1997) Gower’s principles of modern company law, 6th edn. Sweet & Maxwell, London De Luca N (2017) European company law. Cambridge University Press, Cambridge, pp 85–103 Enriques L, Gelter M (2006) Regulatory competition in European Company Law and creditor protection. Eur Bus Organ Law Rev 7:433 Ferri G (1986) Le Società. Utet, Turin Frank A (2016) Formwechsel im Binnenmarkt – Die Grenzüberschreitende Umwandlung von Gesellschaften in Europa. Mohr Siebeck, Heidelberg Gerner-Beuerle C, Mucciarelli F, Schuster E, Siems M (2017) Study on the law applicable to companies: final report. https://doi.org/10.2838/527231 Gerner-Beuerle C, Mucciarelli FM, Schuster E, Siems M (2018) Cross-border reincorporations in the European Union: the case for comprehensive harmonisation. J Corp Law Stud 18:1–42 Gerner-Beuerle C, Mucciarelli FM, Schuster E, Siems M (2019) The private international law of companies in Europe. Beck-Hart-Nomos, Munich Kindler P (2015) Internationales Handels- und Gesellschaftsrecht. In: Münchner Kommentar BGB, vol 11, 6th edn. C.H. Beck, Munich Kindler P (2016) Unternehmen im Binnenmarkt: Transparenz und Nachhaltigkeit? Deutsche Notarzeitschrift Sonderheft (1):75–102 Lamandini M (2015) Voto plurimo, tutela delle minoranze e offerte pubbliche di acquisto. Giur Comm 491 Latty ER (1955) Pseudo-foreign corporations. Yale Law J 65:137 Lombardo S (2009) Regulatory competition in company law in the European Union after Cartesio. Eur Bus Organ Rev 10:647 Mucciarelli FM (2010) Società di capitali, trasferimento all’estero della sede sociale e arbitraggi normativi. Giuffrè, Milan Pernazza F (2017) Fiat Chrysler automobiles and the new face of corporate mobility in Europe. Eur Company Financ Law Rev 14:37–72 Portale GB (2005) La riforma delle società di capitali tra diritto comunitario e diritto internazionale privato. Europa e Diritto Privato, 117 Romano R (1985) Law as a product: some pieces of the incorporation puzzle. J Law Econ Org 1: 225 Santagata C (1964) La fusione tra società. Morano, Neaples Santagata C, Santagata R (2004) Fusione – Scissione. In: Colombo GE, Portale GB (eds) Trattato delle società per azioni, vols 7–2(1). Utet, Turin Schmidt J (2016) Cross-border mergers and divisions, transfers of seats: is there a need to legislate?, Study for the European Parliament Teichmann C (2012) Der Grenzüberschreitende Formwechsel ist Spruchreif: Das Urteil des EUGH in der Rs. VALE. Der Betrieb 37:2085

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Tröger TH (2005) Choice of jurisdiction in Eropean corporate law – perspectives of European corporate governance. EBOR 6:5 Ventoruzzo M (2007) Criteri di valutazione delle azioni in caso di recesso del socio. Riv Soc 309 Ventoruzzo M (2015) The disappearing taboo of multiple voting shares: regulatory responses to the migration of chrysler-fiat. ECGI Law Working Paper N 288/2015 Weller MP (2013) Unternehmensmobilität im Binnenmarkt. Festschrift für Blaurock. Mohr Siebeck, Heidelberg, p 497 Winter RK (1977) State law, shareholder protection, and the theory of the corporation. J Legal Stud 6:251

Federico M. Mucciarelli is a Reader in law at the School of Finance and Management, SOAS University of London, and an associate professor at the Department of Economics of the University of Modena and Reggio Emilia. He got a JD from the University of Bologna (1996), an LL.M. from the University of Heidelberg (2000), and a PhD in business law from the University of Brescia (2003). He was visiting scholar in many research institutes and University, such as the Max-Planck Institute of Hamburg, the University of Oxford and the IALS of London, and worked at the Italian Central Bank.

Appraisal Rights in the US and the EU Alexandros Seretakis

1 Introduction Appraisal rights are a shareholder protection mechanism allowing minority shareholders to receive fair value for their shares in case of extraordinary corporate events, most notably merger transactions. They were originally designed in the US for compensating minority shareholders for the shift from unanimous consent for mergers and other fundamental changes to majority shareholder voting requirements. Traditionally, appraisal statutes were considered as serving a liquidity function.1 According to this view, the appraisal remedy seeks to protect a minority shareholder who would otherwise be imprisoned in a new corporation. Appraisal rights provide minority shareholders liquidity and an exit from an involuntarily altered investment. This traditional view of appraisal rights was fiercely criticized and discredited by Bayless Manning in an influential article on the remedy.2 Instead, most of current legal scholarship views appraisal rights as a shareholder remedy against conflicted transactions serving as a check against management and majority shareholders.3 The procedural hurdles in asserting appraisal rights and the narrow nature of the remedy led academic commentators and practitioners to dismiss appraisal rights as “a remedy of desperation”.4 Shareholders seemed reluctant to exercise appraisal rights and bear the related delays and costs. Nevertheless, recent years have seen a

1

See Thomson (1995), pp. 3–5, 9–42; Wertheimer (1998). Manning (1962). 3 See for instance Fischel (1983). 4 Eisenberg (1969), p. 85. See also Fried and Ganor (2006), p. 1005. 2

A. Seretakis (*) Trinity College Dublin, School of Law, Dublin, Ireland e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_4

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surge in appraisal petitions in the US, most notably in the context of shareholder activism by hedge funds. The resurgence of appraisal petitions is being driven by a category of hedge funds, which have devised a novel investment strategy termed appraisal arbitrage. For example, following Dell’s buyout by its founder, Michael Dell, and private equity group Silver Lake Partners, shareholders, including iconic shareholder activist Carl Icahn, opposed the deal and exercised appraisal rights arguing that the Dell buyout was underpriced.5 In a landmark decision in 2016, the Delaware Chancery Court sided with shareholders and held that the fair value of Dell stock was 27% higher than the buyout price. Another notable case of appraisal arbitrage was the 2013 buyout of Dole Food by its founder and controlling shareholder, David Murdock.6 A group of hedge funds specializing in appraisal arbitrage criticized the buyout for undervaluing the company and brought appraisal actions forcing eventually David Murdock to enter into a settlement. Despite the growing popularity of appraisal rights in the U.S., the appraisal remedy remains a sparingly utilized weapon in the arsenal of shareholders in the EU. Even though certain US based hedge funds have sought to replicate the success of appraisal arbitrage strategies in the US in the EU, numerous factors, including the lack of harmonization of appraisal rights on the EU level, severely hinder the exercise of the remedy. Indeed, market participants and EU institutions, such as the European Commission, have repeatedly cited the lack of harmonization as regards minority shareholder protection as an obstacle to the efficient operation of the cross-border mergers market in the EU.7 The aim of this chapter is to offer a comparative examination of appraisal rights in the US and the EU and decipher the factors that have led to the growing use of the appraisal remedy in the US and its underutilization in the EU. Part I will provide an overview of the legal framework for mergers in the US and the EU and scrutinize appraisal rights in these two jurisdictions. It should be noted that discussion of the legal framework of mergers and appraisal rights will be limited to the legal regime in the state of Delaware.8 Moreover, Part II will discuss how hedge funds exploit the appraisal remedy in order to reap profits and assess the dangers posed by this practice. Finally, Part III will assess the factors that have resulted in the resurgence of appraisal petitions in the US and the underutilization of the remedy by shareholders in the EU.

5

Hoffmann (2016). Hoffmann (2013). 7 See for instance Bech-Bruun, Lexidale (2013), pp. 68–69. 8 Delaware is the leading state of incorporation for U.S. public companies with more than half of all US publicly-traded companies incorporated in Delaware. See Roe (2009), p. 130. Delaware’s competitive advantages include a highly specialized judiciary in resolving corporate law disputes, responsiveness to the needs of its corporations and network benefits stemming from its position as the leading incorporation jurisdiction. See generally Kamar (1998), pp. 1913–1919. 6

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2 Mergers and Appraisal Rights in the US and the EU 2.1

The Legal Framework for Mergers in the US and the EU

Mergers are one of the most fundamental corporate transactions, which radically alter the pre-existing relationships among the stakeholders in a company. In a merger transaction, the assets and liabilities of two or more companies are pooled into a single company.9 The company resulting from the merger transaction can be either a new company or one of the pre-existing companies. Merger transactions in the US are regulated both at the federal and state level. Federal regulation takes the form of antitrust and securities regulation. For instance, Regulation 14A and 14C of the Securities Exchange Act of 1934 govern shareholders’ solicitations in mergers, while the Hart-Scott-Rodino Antitrust Improvements Act requires companies which plan to effectuate large mergers to notify the government. State law governs the corporate law aspects of mergers. The basic merger statute in Delaware is Section 251 of the Delaware General Corporation Law (DGCL). Reflecting the managerial principles of US corporate law,10 section 251 requires the board of directors of each constituent corporation to adopt a resolution approving the merger agreement. As a result, the decision to execute a merger is initiated by the board of directors.11 Following the approval of the merger agreement by the board of directors, the agreement must be submitted for approval to the shareholders of each constituent corporation either at annual or special shareholder meeting.12 The merger agreement must be approved by a majority of the outstanding shares entitled to vote thereon.13 The rationale underpinning the requirement for shareholder authorization is the extraordinary nature of merger transactions and the spectre of conflicts of interest between shareholders and management.14 The board of directors of each merging corporation is granted the power to abandon a merger without shareholders’ approval provided that the merger agreement reserves that power.15 Pursuant to section 259 of the DGCL, once the merger becomes effective, the corporation surviving or resulting from the merger succeeds, by operation of law, to all the rights and liabilities of each constituent corporation.

9

See Kraakman and Armour (2017), p. 183. Pursuant to section 141(a) of the DGCL the power to manage the business affair of the corporation is vested with the board of directors. Del. Code Ann. tit. 8, § 141. 11 For a critique of the board-centric model of US corporate law and the power granted to the board of directors to initiative mergers and other fundamental changes see Bebchuk (2005). 12 Del. Code Ann. tit. 8, § 251(c). 13 ibid. 14 For instance, mergers may be driven by managers’ empire building motive. See e.g. Marris (1963). As Jensen notes managing a larger company will typically result in an increase in managers’ compensation. Furthermore, managers may be tempted to execute a merger by the increased prestige associated with running a larger company. See Jensen (1989). 15 Del. Code Ann. tit. 8, § 251(d). 10

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Moreover, Delaware courts play a key role in regulating merger transactions in cases where there is an omnipresent spectre of conflict of interests. Corporate officers, directors and controlling shareholders are subject to fiduciary duties, which are interpreted and enforced by Delaware courts.16 For instance, controlling shareholders owe the fiduciary duty of loyalty to the controlled companies and minority shareholders. Controlling shareholder transactions with the companies they control, including mergers, are subject to the heightened entire fairness review instead of the deferential business judgment rule. Mergers in the EU are governed by Directive 2011/35/EU concerning mergers of public limited companies17 and Directive 2005/56/EC on cross-border mergers of limited liability companies.18 The original aim of these Directives was to facilitate EU companies’ external growth enabling them to compete with foreign enterprises and in particular U.S. and Japanese companies.19 Directive 2011/35/EU concerning mergers of public limited companies, which replaced the original Third Company Law Directive, is applicable only to national mergers. The goal of the original Third Company Law Directive was to pave the way for the adoption of the Cross-Border Mergers Directive by harmonizing the national laws on mergers. Directive 2011/35/ EU regulates both the procedure and validity of mergers of public limited liability companies. The Directive includes informational requirements mandating the preparation and publication of draft terms of the merger and a merger report. According to article 9 of the Directive, the merger report which must be prepared by the board of each constituent company must contain an explanation of the draft terms of the merger. Furthermore, article 10 of Directive 2011/35/EU mandates the drawing up of an expert report on the draft terms, which must include the experts’ opinion on the fairness of the share exchange ratio and the valuation methods used. The rules regarding shareholder authorization are set out in article 7. A merger must be approved by a resolution of the general meeting. The resolution must be adopted by a majority of not less than two thirds of the votes attaching either to the shares or to the subscribed capital represented. Finally, article 19 of Directive 2011/35/EU states the legal consequences of a merger, while article 21 lays down the conditions for nullification of mergers under the laws of Member States. The Cross-Border Mergers Directive represents one of the most significant pieces of EU legislation in the field of company law. The adoption of the Directive was prompted by the lack of harmonisation of Member States’ rules on cross-border mergers, which made them prohibitively expensive and resulted in uncertainty

16

See generally Morrissey (2013). Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies [2011] OJ L 110/1. 18 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies [2005] OJ L 310/1 (Cross-Border Mergers Directive). 19 Grundmann (2012), p. 668. 17

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regarding their validity under the laws of certain Member States.20 Cross-border mergers are a key mechanism for the integration of EU markets. The deepening of the single market has led to an exponential growth of cross-border combinations. Member States are obliged by virtue of the Directive to allow cross-border mergers. The Directive is applicable to mergers of limited liability companies which have been formed in accordance with the law of a Member State and have their registered office, central administration or principal place of business within the Community. For a merger to be considered cross-border at least two of the constituent companies must be governed by the laws of different Member States. Pursuant to article 4(1)(a) of the Cross-Border Mergers Directive, cross-border mergers shall only be possible between types of companies, which may merge under the national law of the relevant Member States. Furthermore, according to article 4(1)(b), companies participating in a cross-border merger must comply with the provisions and formalities of the national law to which they are subject, including those concerning the decision-making process, the protection of creditors, debenture holders, holders of securities or shares and employees. Thereupon, companies undertaking cross-border mergers are subject to the national merger laws transposing the Merger Directive, unless the Cross-Border Mergers Directive provides otherwise. The Cross-Border Merger Directive contains rules mandating the preparation and publication of common draft terms of cross-border merger.21 In addition, the board of each merging company must draw up a merger report analysing the economic and legal aspects of the merger and its implications.22 What is more, article 8 requires the drawing up of an independent expert report examining the draft terms of the merger. A cross-border must be approved by the general meeting of each merging company according to the majority and quorum requirements determined by national law. Article 11 regulates the scrutiny of the legality of a cross-border merger. The legality of a cross-border merger shall be scrutinized by a court, notary or other authority designated by the respective Member States before the completion of the merger. Finally, article 14 states the legal effects of the cross-border merger.

2.2

Appraisal Rights in the US and the EU

The US boasts the most developed framework for appraisal rights. Appraisal rights exist in most US states. As the favoured state of incorporation of companies in the US, Delaware is the preeminent venue for M&A litigation in the US, including the exercise of appraisal rights in connection with merger transactions. The scope of the appraisal remedy in Delaware is narrow. In contrast to other US states which extend

20

See Papadopoulos (2008), p. i. Cross-Border Mergers Directive, art. 5. 22 ibid., art. 7. 21

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the appraisal remedy to a host of extraordinary corporate events, such as charter amendments, corporate conversions and significant asset sales,23 Delaware’s appraisal statute covers only mergers and consolidations. Nevertheless, according to 262(c) DGCL, a corporation may provide in its articles of incorporation that appraisal rights are allowed in case of an amendment to the articles or a sale of all or substantially all assets. What is more, the availability of appraisal rights in case of mergers depends on the consideration offered. Section 262(b)(1) of the DGCL contains a so-called market out exception, which limits appraisal rights. Appraisal rights are not available for shares of a company listed on a national securities exchange or held by more than 2000 holders of record. The premise animating the market out exception is that the appraisal remedy would offer no benefits to a shareholder who still enjoys an exit option via a sale of his shares on the market at a fair price.24 However, section 262(b) (2) reinstates appraisal rights by introducing an exception to the exception. Appraisal rights become available again if the merger consideration consists of anything except stock in the surviving corporation or stock that is listed or held by more than 2000 shareholders. Furthermore, the exercise of appraisal rights is subject to cumbersome procedural requirements. Pursuant to section 262(a) of the DGCL a shareholder who wishes to exercise appraisal rights must file a written demand on the corporation prior to the general meeting voting on the merger transaction. The petitioner must be a record stockholder who owns the shares when the demand is made. Furthermore, the shareholder must vote against the merger or abstain from voting, continuously hold the shares for which appraisal is sought through the effective date of the merger and file a petition for appraisal in the Delaware Court of Chancery within 120 days of the effective date of the merger. The remedy offered by the court is the fair value of the shares plus interest. The Delaware Chancery Court determines the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger together with interest.25 The Court must consider all relevant factors when determining fair value.26 Appraisal proceedings are expensive and time-consuming. Their duration ranges from 2 years to 4 years and they typically involve a “battle of experts” with both sides calling upon financial experts for testimony.27 As far as appraisal rights in Europe are concerned, the European legislator has not yet introduced a US-style general appraisal right with respect to fundamental corporate changes. Thereupon, there is no harmonization of appraisal rights on the EU level. Article 28 of Directive 2011/35/EU concerning mergers of public limited companies introduces limited appraisal rights for minority target shareholders in case

23

See Siegel (2011), pp. 233–234. Note (1976), p. 1030. 25 Del. Code Ann. tit. 8, § 262(h). 26 ibid. 27 Papadima (2015), p. 190. 24

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of mergers carried out by a company holding 90% or more of the shares of the company being acquired. In contrast, the Cross-Border Mergers Directive leaves the introduction of appraisal rights in the context of cross-border mergers on individual Member States. Article 4(2) of the Cross-Borders Directive allows but does not require Member States to adopt provisions designed to ensure protection for minority shareholders who have opposed the merger. Article 10(3) further provides that if the law of a Member State to which a merging company is subject provides for a procedure to compensate minority shareholders, without preventing the registration of the merger, such procedure shall only apply if the other merging companies situated in Member States which do not provide for such procedure have explicitly approved it when approving the draft terms of the merger. The Directive is rather vague as to who qualifies as a minority shareholder, which company’s (surviving or disappearing entity) minority shareholders will receive protection and the form of the protection.28 As a result, Member States’ rules regarding appraisal rights exhibit significant differences with respect to the events triggering appraisal rights, the form of appraisal rights and the procedural requirements for exercising appraisal rights. Nevertheless, there is growing momentum for the introduction of harmonized appraisal rights in the context of cross-border mergers. The 2013 Study on the Application of the Cross-Border Mergers Directive identified the lack of harmonization as regards minority shareholder protection as an obstacle to cross-border merger activity.29 Following the 2012 EU Commission Action Plan on European Company Law and Corporate Governance, which announced that the Commission would consider amendments to improve the Cross-Border Mergers Directive, the Commission launched in 2014 a consultation on Cross-Border Mergers and Divisions.30 The majority of respondents were in favour of harmonization of minority shareholder rights in connection with cross-border mergers. Their preferred method of harmonization was full harmonization. Most notably, proponents of harmonization considered the right to request compensation, namely appraisal rights, as the appropriate remedy.

3 The Rise of Appraisal Arbitrage 3.1

The Benefits and Perils of Appraisal Arbitrage

The past couple of years have witnessed an exponential growth of appraisal petitions in the US. In the early 2000s only 2–3% of eligible deals attracted appraisal

28

Wyckaert and Geens (2008), p. 43. ibid, 47–48. 30 European Commission (2015). 29

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petitions.31 By 2014 approximately 20% of appraisal-eligible transactions attracted an appraisal petition.32 Furthermore, the values at stake in appraisal proceedings have increased considerably. The value of the dissenting shares in Delaware appraisal petitions has shot up from approximately $150 million in 2004 to almost $1.5 billion in 2013.33 The surge in appraisal petitions is attributed to the rise of a new breed of hedge funds specializing in so-called appraisal arbitrage. Appraisal arbitrage involves professional investors, most notably hedge funds, buying a large number of shares of a company after the announcement of a merger with the aim of asserting appraisal rights and benefiting from a price increase.34 Hedge funds dominate the appraisal arbitrage strategy with the majority of appraisal petitions filed by them.35 They also account for the largest dollar amount of the total shares seeking appraisal.36 In addition, well-known mutual funds and insurance companies are beginning to exercise appraisal rights more vigorously.37 A small number of repeat players are the top appraisal petitioners. A small handful of hedge funds, most notably Merion Capital, Magnetar Capital, Merlin Partners, Quadre Investments and Ancora, are the top filers both by number of transactions challenged and total dollar value.38 Indeed, Merion Capital, which has allegedly $1 billion of asset management dedicated to appraisal arbitrage, pioneered the strategy. These hedge funds are also increasingly adopting wolf-pact tactics by targeting the same deals. In addition, activist hedge funds, such funds associated with Carl Icahn, are threatening companies with the exercise of appraisal rights in order to block mergers or force the bidder to pay a higher merger price. The spectacular increase in appraisal petitions has led to the emergence of appraisal conditions in M&A deals. In order to counter appraisal risk, buyers are insisting on the insertion of appraisal conditions into deal documents, which give the buyer the right to walk away from the transaction if a specified percentage of shares, usually 10–15%, assert appraisal rights.39 The aim of appraisal conditions is to shield the buyer from a substantial increase in the total cost of the acquisition in case a large number of shares seek appraisal and a court determines that the fair value is significantly above the deal price. In contrast to the US, the exercise of appraisal rights and appraisal arbitrage remain rare phenomena in the EU. Minority shareholders in the EU seem reticent to take advantage of the protection offered by the appraisal remedy. In addition, they do not seem to have recognized the potential of appraisal rights arbitrage as a rewarding

31

Jiang et al. (2016), pp. 704–705. ibid. 33 Korsmo and Myers (2015), pp. 1570–1571. 34 Mei (2014–2015), p. 83. 35 Jiang et al. (2016), p. 704. 36 ibid, 705. 37 ibid. 38 ibid, 706. 39 See generally Subramanian (2017). 32

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investment strategy. Nevertheless, recent years have seen some US hedge funds aggressively pursuing appraisal arbitrage strategies. A notable example was the acquisition of German cable operator Kabel Deutschland by Vodafone, the British multinational telecommunications company. Following criticism regarding the price offered by Vodafone, Paul Singer’s Elliott Management, a minority shareholder in Kabel Deutschland, instigated legal action demanding higher compensation.40 In another instance, Elliott Management threatened to derail drug distributor’s McKesson acquisition of German pharmaceutical company Celesio by initiating appraisal proceedings.41 Finally, a recent example was Elliott’s intervention in the buyout of German generic drugmaker Stada by private equity firms Bain Capital and Cinven, which compelled the buyer to increase the price offered to minority shareholders.42 The explosion of appraisal has been met with increased scepticism by academics and practitioners who point out the negative effects of appraisal on deal making. Critics of appraisal arbitrage decry the speculative nature of the strategy, which is being used by short-term shareholders in order to reap extravagant profits and is against the original legislative purpose of the appraisal remedy.43 According to opponents of appraisal arbitrage, the strategy has a chilling effect on deal activity, since buyers faced with appraisal risk will prefer to abstain from entering into M&A transactions.44 Furthermore, buyers who decide to engage in M&A transactions will offer target shareholders a lower purchase price as compensation for appraisal risk.45 Moreover, critics contend that appraisal rights are being used as a strike suit by shareholders in order to force buyers to enter into a settlement. Nevertheless, in their recent study Jiang et al. conclude that despite the concerns about the perils of appraisal, appraisal serves as a shareholder remedy against managerial and controlling shareholder opportunism.46 In particular, the authors find that appraisal petitioners are more likely to target mergers with perceived conflicts of interest, such as going-private transactions, minority squeeze-outs and deals with low offered premiums. In another study, Kalodimos and Lundberg examine the use of the appraisal remedy and find evidence that appraisal rights are functioning as recourse when the target firm is sold below fundamental value.47 The authors find that deals attracting appraisal petitions tend to have substantially lower merger premia. In addition, the acquirers of petitioned target have significantly higher abnormal returns around the deal announcement. The authors suggest that these failures are driven by the inexperience and busyness of target boards and

40

Thomson and Webb (2013). Jack (2013). 42 Massoudi (2017). 43 Norwitz (2015). 44 ibid. 45 ibid. 46 Jiang et al. (2016). 47 Kalodimos and Lundberg (2017). 41

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management. Finally, in another study Boone et al. find that the threat of appraisal does not have any effect on deal activity.48 Overall, the results of these studies are consistent with the view that appraisal serves as a significant shareholder protection mechanism.

3.2

The Drivers of Appraisal Arbitrage

Numerous commentators have sought to offer explanations for the surge in appraisal petitions and appraisal arbitrage, especially in the US. A confluence of factors, including legal and market developments, appear to be the drivers of the increased appraisal activity. The exponential growth of appraisal litigation is often attributed to a Delaware Court of Chancery decision called In re Appraisal of Transkaryotic Therapies.49 The case concerned the acquisition of Transkaryotic Therapies, a biotech company, by Shire Pharmaceuticals Group. A group of twelve beneficial shareholders holding approximately 11 million shares decided an appraisal petition. The petitioners had purchased their shares after the record date for the shareholders’ meeting voting on the merger but before the date of the shareholders’ meeting. The question in Transkaryotic was whether shareholders who had purchased their stock after the record date could assert appraisal rights even though they could not show how the particular shares had voted and thus could not comply with the procedural requirement that they must have voted against or abstained from voting on the merger. Due to the move towards dematerialization and the elimination of paper stock certificates, the majority of public company shares are nowadays held on deposit with the Depositary Trust Company (DTC), a central securities depository.50 Shareholders who purchase shares are termed beneficial owners and enjoy all the benefits of ownership, such as receipt of dividends and voting. However, their shares are registered in the name of DTC’s nominee, Cede & Co., which is the record holder of the shares. The securities deposited are held in an undifferentiated manner, known as fungible bulk, which means that a beneficial owner does not have a traceable ownership claim to specific securities. As a result, a beneficial owner who acquires his shares after the record date cannot prove that the shares were not voted in favour of the merger. The Delaware Chancery Court in Transkaryotic rejected such a sharetracing requirement. In contrast, it reasoned that it is the record holder’s actions which determine perfection of appraisal rights. The Court held that shares purchased after the record date were eligible for appraisal provided that the number of shares

48

Boone et al. (2017). In re Appraisal of Transkaryotic Therapies, Inc., No. Civ.A. 1554-CC, 2007 WL 1378345, at 1 (Del. Ch. May 2, 2007). For an in-depth analysis of the case see Geis (2011). 50 For an excellent description of the US system of share ownership see Kahan and Rock (2008), pp. 1236–1247. 49

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held by Cede which voted against the merger, abstained or not voted, were equal to or exceeded the number of shares that voted in favour of the merger. The decision in Transkaryotic is widely considered to have served as a catalyst to the exponential growth of appraisal petitions and has been characterized as a boon to appraisal arbitrageurs. The decision granted appraisal arbitrageurs a substantial timing advantage by allowing them to purchase shares until just before the shareholder meeting voting on the merger. The ability of an appraisal arbitrageur to postpone his investment allows him to gather more information regarding his investment and take into account new developments regarding the target and the transaction.51 Moreover, the ability of appraisal arbitrageurs to delay their acquisition of shares minimizes their exposure to the risk that the announced merger may not be completed.52 Another factor that contributed to the rise of appraisal arbitrage is the relatively high prejudgment interest rate. Pursuant to the DGCL the remedy available to appraisal petitioners is fair value together with interest. The interest rate is set a 5% over the Federal Reserve discount rate, compounded quarterly, from the closing date of the merger until the date that the award is actually paid.53 The interest is paid on the amount determined to be fair value. In the current low interest rate environment, the statutory interest rate is well above the interest rate offered by many fixedincome investments. The high statutory interest has made appraisal arbitrage a form of interest rate arbitrage. Indeed, Jiang et al., show that interest rate accrual is a more important contributor to the returns to appraisal litigation than valuation improvement, namely a higher valuation awarded by the court over the merger price.54 In response to criticism that the DGCL unfairly benefited appraisal arbitrageurs,55 the Delaware legislature in 2016 amended section 262(h) allowing corporation to pay appraisal petitioners at any time before the entry of judgment an amount in cash toward the fair value of the stock. As a result, interest accrues only on the amount by which the award exceeds the pre-paid amount. The interest rate reduction is expected to chill appraisal activity. In addition, it is easier for a petitioner to assert an appraisal claim rather than a claim alleging breach of fiduciary duty.56 Shareholder litigation concerning fiduciary duty claims in connection with M&A transactions requires proving wrongdoing, such as diversion of corporate assets for personal gain, or flaws in the sale process. A shareholder will typically file jointly an appraisal and a fiduciary duty action.

51

Jetley and Ji (2017). ibid. 53 Del. Code Ann. tit. 8, § 262(h). 54 Jiang et al. (2016), p. 720. 55 Jetley and Ji find that Delaware’s statutory interest rate is higher than the risk-free rate and the yield on U.S. corporate bonds both with a maturity of 3 years. The authors conclude that ‘the statutory interest rate has compensated appraisal petitioners for more than the time value of money and for more than a bond-like claim’. 56 Papadima et al. (2016), p. 1076. 52

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Finally, another driver of appraisal activity has been the tendency of courts to grant appraisal awards higher than the merger price. Courts have wide latitude in determining fair value. A survey of Delaware post-trial appraisal decisions from 2010 until 2014 found that in the majority of cases the court’s determination of fair value was higher than the merger price.57 It should be noted that fair value is the going concern value of the company excluding any merger synergies and any control premium. In determining the going concern value of a company the Delaware Chancery Court will typically use a discounted cash flow analysis.58 What is more, in a 2010 decision the Delaware Supreme Court refused to create a presumption in favour of the merger price and stated that requiring the Court of Chancery to rely, even presumptively, on the merger price would inappropriately shift the responsibility to determine fair value from the court to the private parties.59 Nevertheless, in the last couple of years the Chancery Court has increasingly deferred to the merger price as a reliable indicator of fair value in disinterested transactions where there has been a robust sales process.60 The Chancery Court seems unwilling to second-guess the price resulting from an arms-length and a robust sales process.61

4 The Dismal State of Appraisal in the EU In contrast to the US, where an enabling legal regime and fortunate confluence of a variety of factors have led to a surge of appraisal petitions and appraisal arbitrage, the appraisal remedy remains a sparingly utilized weapon in the arsenal of shareholders in the EU. Minority shareholders in the EU are reticent to exercise appraisal rights. One could plausibly argue that appraisal rights serve as a remedy of desperation for shareholders in the EU. The appraisal remedy is viewed as a last resort measure by shareholders. Furthermore, in cases where shareholders exercise their appraisal rights, their interventions tend to be incidental and ex post. Moreover, shareholders in the EU have not yet recognized the potential of appraisal arbitrage as a rewarding investment strategy. Unlike shareholders in the EU, appraisal arbitrageurs in the US utilize the appraisal remedy in a strategic and ex ante manner. The exercise of

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Bomba et al. (2014), p. 3. For an introduction into discounted cash flow analysis see Higgins (2012), pp. 247–295. 59 Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214 (Del. 2010). 60 Weinstein and Magnino (2017). The recent decision of the Delaware Supreme Court in Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd, which overturned the Delaware Chancery Court’s 2016 decision, strongly reinforced the view that the merger price serves as the best indication of appraisal value. Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd 2017 WL 6375829 (Del. Dec. 14, 2017). 61 For a criticism of courts’ reliance on merger price see Choi and Talley (2017). For instance, the scholars argue that reliance on merger price effectively neutralizes the appraisal remedy and dissuades shareholders from filing appraisal petitions, since appraisal can never result in a premium over the merger price. 58

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appraisal rights forms part of a carefully planned and implemented investment strategy aimed at generating returns. Despite the fact that some US hedge funds, which are willing to use appraisal rights as part of their overall strategy, are increasing their activities in the EU, a variety factors, including a hostile legal regime, hinder the growth of appraisal and appraisal arbitrage in the EU. In particular, the lack of harmonization of appraisal rights across EU Member States, severely hampers their exercise. Indeed, investors have voiced their concerns regarding the lack of harmonization in the context of cross-border mergers arguing that multiple divergent legal regimes are an obstacle to cross-border deal activity. The divergence of legal rules imposes significant costs and introduces uncertainty. For instance, an investor based in one Member State who wishes to invest in a company in another EU Member State must gather information on and analyse the legal framework governing appraisal rights. As a result, the investor may decide not to undertake the investment. Therefore, the lack harmonization can hinder the free movement of capital one of the key elements in the EU single market. By the same token, a hedge fund seeking to engage in appraisal arbitrage in the EU must become familiar with 28 different legal frameworks, in order to evaluate whether the exercise of appraisal could generate returns for the fund’s investors. Consequently, the fund may decide that appraisal arbitrage is not an attractive investment strategy. Moreover, another factor inhibiting the growth of appraisal is that stock markets in the EU are generally less liquid than US stock markets. Foucault et al. define “liquidity as the ability to trade a security quickly at a price close to its consensus value”.62 Indeed, Jiang et al. find that appraisal petitioners are more likely to target deals with greater institutional ownership suggesting that petitioners target such deals because such stocks have a more liquid market, especially after the announcement date of the merger and around the record date.63 The ability of an appraisal arbitrageur to amass a stake in the target’s stock rapidly and without any price impact, which would raise the cost of acquisition, depends on the liquidity of the underlying market in the target’s stock. As a result, the liquidity of the underlying market is a crucial factor influencing the decision of an appraisal arbitrageur to buy stock and engage in appraisal arbitrage. In certain market segments in the EU, such as small capitalization stocks or stocks trading in smaller EU markets, where liquidity is low, the ability of appraisal arbitrageurs to amass a stake in the target’s stock is severely constrained. Finally, the dismal state of appraisal in the EU should also be attributed to the underdevelopment of the investment fund sector. In particular, the US dominates the global hedge fund sector both in size and sophistication. The US remains the leading 62 Foucault et al. (2013), p. 8. Liquidity is typically measured by the bid-ask spread. The higher the bid-ask spread the less liquid the market. In most markets the bid-ask spread is set by dealer or market makers. The spread is the difference between the minimum price at which the dealer is willing to sell a security and the maximum price at which the dealer is willing to buy a security. See Schaeken Willemaers (2011). Numerous studies have found that stock market liquidity is crucial for economic growth. See Levine and Zervos (1998) and Atie and Jovanovic (1993). 63 Jiang et al. (2016), pp. 712–713.

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centre for hedge fund management with approximately 5400 funds managing close to $1.5 trillion of assets.64 Due its leading position, the US hedge fund sector is a laboratory for innovation in hedge fund strategies constantly inventing new strategies, such as appraisal arbitrage. While the hedge fund sector in the EU has witness significant growth during the last years it remains smaller and less sophisticated than the US hedge fund sector.65 Consequently, EU based hedge fund managers and investors have still not recognized the potential of appraisal arbitrage as a profitable investment strategy.

5 Conclusion The rise of appraisal arbitrage has resulted in a spectacular increase in appraisal petitions in the US and has led to a rejuvenated interest in appraisal rights. Despite the growing use of appraisal rights in the US, this protection mechanism remains underutilized by shareholders in the EU. The present chapter has sought to offer a comparative examination of appraisal rights in the US and the EU and scrutinize the benefits, perils and drivers of appraisal arbitrage. Finally, it has sought to decipher the factors that have led to the growing use of the appraisal remedy in the US and its underutilization in Europe. Acknowledgements I would like to thank participants at the “Cross-Border Mergers Directive: EU perspectives and national experiences” conference, in particular Arkadiusz Radwan and Thomas Papadopoulos, for useful comments.

References Atie R, Jovanovic B (1993) Stock markets and development. Eur Econ Rev 37:632–640 Bebchuk L (2005) The case for increasing shareholder power. Harv Law Rev 118:833–914 Bech-Bruun, Lexidale (2013) Study on the application of the cross-border mergers directive Bomba A, Epstein S, et al (2014) New activist weapon-- the rise of delaware appraisal arbitrage: a survey of cases and some practical implications. Fried Frank M&A Briefing Boone A, Broughman B, Macias A (2017) Merger negotiations in the shadow of judicial appraisal. Indiana Legal Studies Research Paper 381, pp 1–50 Choi A, Talley E (2017) Appraising the merger price appraisal rule. Virginia Law and Economics Papers 2017-01, pp 1–38 Eisenberg M (1969) The legal roles of shareholders and management in modern corporate decisionmaking. Calif Law Rev 57:1–181

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Stowell (2018), p. 249. The EU hedge fund sector will also be negatively impacted by the UK’s exit from the EU. The UK is the leading hedge fund center in Europe with London hosting some of world’s best-known hedge funds such as The Children’s Investment Funds and Brevan Howard. For an aggregated picture of hedge fund activity in the UK see Financial Conduct Authority (2015), p. 4. 65

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European Commission (2015) Summary of the responses to the public consultation on cross border mergers and divisions Financial Conduct Authority (2015) Hedge fund survey Fischel D (1983) The appraisal remedy in corporate law. Am Bar Found Res J 8:875–902 Foucault T, Pagano M, Röell A (2013) Market liquidity: theory, evidence and policy. Oxford University Press, Oxford Fried J, Ganor M (2006) Agency costs of venture capitalist control in startups. N Y Univ Law Rev 81:967–1025 Geis G (2011) An appraisal puzzle. Northwest Univ Law Rev 105:1635–1677 Grundmann S (2012) European company law: organization, finance and capital markets. Intersentia, Cambridge Higgins R (2012) Analysis for financial management. McGraw-Hill, New York Hoffmann L (2013) Dole Food accept CEO’s $1.2 Billion buyout deal. The Wall Street Journal, October 13 Hoffmann L (2016) Judge finds Michael Dell, Silver Lake underpaid for Dell in 2013. The Wall Street Journal, June 1 Jack A (2013) Elliott aims to block McKesson’s $8.3bn move for Celesio. The Financial Times, December 10 Jensen M (1989) The eclipse of the public corporation. Harv Bus Rev 87:61–74 Jetley G, Ji X (2017) Appraisal arbitrage-is there a delaware advantage? Bus Law 71:427 Jiang W, Li T, Mei D, Thomas R (2016) Appraisal: shareholder remedy or litigation arbitrage? J Law Econ 59:697–729 Kahan M, Rock E (2008) The hanging chads of corporate voting. Georgetown Law J 96:1227–1281 Kalodimos J, Lundberg C (2017) Shareholder rights in mergers and acquisitions: are appraisal rights being abused? Financ Res Lett 22:53–57 Kamar E (1998) A regulatory competition theory of indeterminacy in corporate law. Columbia Law Rev 98:1908–1959 Korsmo C, Myers M (2015) Appraisal arbitrage and the future of public company M&A. Wash Univ Law Rev 92:1551–1615 Kraakman R, Armour J (2017) The anatomy of corporate law. Oxford University Press, Oxford Levine R, Zervos S (1998) Stock markets, banks and economic growth. Am Econ Rev 88:537–558 Manning B (1962) The shareholder’s appraisal remedy: an essay for Frank Coker. Yale Law J 72:223–265 Marris R (1963) A model of the “managerial” enterprise. Q J Econ 77:185–209 Massoudi A (2017) Elliott seeks premium to back takeover of Stada. Financial Times, August 31 Mei J (2014–2015) Developments in banking law, appraisal arbitrage: investment strategy of hedge funds and shareholder activists. Rev Bank Financ Law 34:83–92 Morrissey D (2013) M&A fiduciary duties: delaware’s murky jurisprudence. Villanova Law Rev 58:121–167 Norwitz T (2015) Delaware legislature should act to curb appraisal arbitrage abuses. http:// clsbluesky.law.columbia.edu/2015/02/10/delaware-legislature-should-act-to-curb-appraisalarbitrage-abuses/. Accessed 26 Dec 2017 Note A (1976) A reconsideration of the stock market exception to the dissenting shareholder’s right of appraisal. Mich Law Rev 74:1023–1066 Papadima R (2015) Appraisal activism in M&A deals: recent developments in the United States and the EU. Eur Company Law 12:188–198 Papadima R, Gherghe M, Valeanu R (2016) Shareholder exit signs on American and European highways: under construction. Univ Pa J Bus Law 18:1059–1130 Papadopoulos T (2008) Legal perspectives on the scope of the tenth company law directive on cross border mergers. Eur Curr Law 10:i–v Roe M (2009) Delaware’s shrinking half-life. Stanford Law Rev 62:125–155 Schaeken Willemaers G (2011) The EU issuer- disclosure regime: objectives and proposals for reform. Kluwer Law International, Alphen Aan Den Rijn

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Siegel M (2011) An appraisal of the model business corporation act’s appraisal rights provisions. Law Contemp Probl 74:231–252 Stowell D (2018) Investment banks, hedge funds and private equity. Academic Press, London Subramanian G (2017) Using deal price for determining fair value in appraisal proceedings. In: Davidoff S, Randall T (eds) The corporate contract in changing times: is the law keeping up? University of Chicago Press, Chicago Thomson R (1995) Exit, liquidity and majority rule: appraisal’s role in corporate law. Georgetown Law J 84:1–60 Thomson A, Webb A (2013) Hedge fund elliott clings to Kabel stock in Vodafone buyout. Bloomberg, October 10 Weinstein G, Magnino B (2017) Appraisal decision sole reliance on merger price: PetSmart. https:// corpgov.law.harvard.edu/2017/06/02/appraisal-decision-sole-reliance-on-merger-pricepetsmart/. Accessed 26 Dec 2017 Wertheimer B (1998) The purpose of the shareholders’ appraisal remedy. Tenn Law Rev 65:661–689 Wyckaert M, Geens K (2008) Cross-border mergers and minority protection: an open-ended harmonization. Utrecht Law Rev 4:40–52

Alexandros Seretakis is an Assistant Professor of Law (Financial Services/Capital Markets) at Trinity College Dublin. His teaching and research interests include financial regulation, alternative investment fund regulation, fintech and corporate governance. He holds a law degree from the Aristotle University of Thessaloniki, an LL.M. in Banking and Finance from University College of London, an LL.M. in Corporation Law from New York University and was a research fellow at the NYU Pollack Center for Law and Business. He completed his PhD at the University of Luxembourg. He is admitted to practice law in Greece and the State of New York.

Shareholders’ Derivative Suits Against Corporate Directors, Following Cross-Border Mergers: A Functioning Remedy Within the EU? Georgios Zouridakis

1 Introduction Shareholder protection has been a focal point in the discussion on the future of the Cross-Border Merger Directive (Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies [2005] OJ L310/1, what is now arts. l18–134 of Directive (EU) 2017/ 1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law [2017] OJEU L 169/46; hereinafter “CBMD”). Contrary to employees, minority shareholders do not enjoy any special treatment under the now applicable European Union (EU) secondary law on cross-border mergers (hereinafter “CBMs”) of limited liability companies. Shareholder protection remains by and large optional under this framework1; and varies from state to state.2 However, the proposed amendment of Directive (EU) 2017/1132 attempts to change that; it includes the insertion of Article 126a (headlined “Protection of members”) to

1

According to art. 121 para 2 of the directive: A Member State may, in the case of companies participating in a cross-border merger and governed by its law, adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger (emphasis added).

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According to Biermeyer and Bech-Bruun (2013), Main Findings, pp. 47–48: In this area, we find inter-State variation in protection of minority shareholders, although the impact of it is not as significant as it was for the issue of creditor protection. In all countries, the procedure starts either at the general meeting or at the date of the registration or publication of the registration of the merger at the registry. [. . .] Finally, the procedures are rather similar in providing for withdrawal or appraisal rights.

G. Zouridakis (*) Athens Institute for Education and Research, Athens, Greece © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_5

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the latter Directive and the introduction of a shareholders’ “exit” right thereby.3 Even though this constitutes a development that is, from a shareholder protection viewpoint, much welcome, there is still much to be said about shareholders’ rights and remedies in the CBM context. Whilst consultation on CBMs at EU level showed that harmonisation is considered desirable and certain forms of protection are expected,4 shareholders’ suits against corporate management do not constitute, as of yet, an important part of the debate.5 Nevertheless, mergers may involve misfeasance against both shareholders and the company; and they—particularly cross-border ones—might have a radical effect on shareholder litigation. That said, the relationship between derivative actions and the CBMD remains a grey area of European company law and legal literature. One that is, to this writer’s view, worth investigating, as derivative actions are considered, internationally, to constitute an important shareholders’ remedy. There could be no better opportunity than this edited volume to share some thoughts on the matter. The analysis unfolds as follows, in five sections. First, it explains the derivative action, its basic features and purpose; and compares it with shareholders’ claims under Directive 2017/1132. It then proceeds with examining the effects of CBMs on derivative litigation, in two stages; claims brought before the merger and those (to be) brought after. Particular focus is placed on rules of substantive law on shareholders’ legal standing and the application of private international law. The conclusion is reached that, caught amidst the mosaic of national laws on derivative actions, the prospects of a shareholder’s suit could be ended abruptly by a CBM, to the detriment of all those involved in and related to the company. The final section of this paper communicates some preliminary thoughts on how such issues could be dealt with.

Commission, ‘Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions’, COM (2018) 241 final, art 1 (13). 4 Within the ambit of the consultation on the CBMD, out of the participants “nearly two thirds (65%) thought that the minority shareholders’ rights should be harmonised, whereas over a third (35%) did not think it necessary. Most replies from lawyers and notaries, universities and companies favoured harmonisation”; see Feedback Statement—Summary of Responses to the Public Consultation on Cross Border Mergers and Divisions—October 2015, p. 9, available at http://ec.europa.eu/internal_ market/consultations/2014/cross-bordermergers-divisions/docs/summary-of-responses_en.pdf, accessed on 7 January 2018. Against harmonisation were a few companies, whilst the most vocal opposition came from trade unions, expressing fears for short-termism of minority shareholders. 5 Full results available at https://ec.europa.eu/eusurvey/publication/cross-border-mergers-divisions. Accessed 7 January 2018. 3

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2 The State of the Art: The CBMD, Art. 106 of Directive (EU) 2017/1132 and Derivative Actions The shareholders’ remedy called the “derivative action” allows a (group of minority) shareholder(s) (otherwise barred from litigating directly in their own name and on their own behalf, by virtue of the no reflective loss principle6 and the principle that only the company may litigate its claims through its competent organs –the “proper plaintiff rule”) to seek remedy on behalf of the company for a wrong suffered by the latter.7 Originally a creation of English common law,8 this remedy spread throughout the continents, in many forms and with varying success.9 It proposes itself as an ingenious solution for shareholders seeking to make good for their reflective losses when corporate administration does not take action, putting them—temporarily and under various conditions—at the helm of corporate litigation. Therefore, shareholders’ loss is remedied without affecting core principles of company law, an (exceptional) intervention by the court to the organisational structure of the company notwithstanding. At an EU level, derivative actions are not harmonised.10 Most Member States (hereinafter “MSs”) do provide for some kind of derivative action or functionally equivalent mechanism, but the rules differ among themselves in cardinal aspects of the remedy, such as conditions for legal standing, rules on costs’ allocation and the suit’s scope of defendants.11 Be it as it is, regarding mergers in a national context, MSs are under the obligation to provide for certain shareholder protection against management. According to the Domestic Merger Directive [Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54(3)(g) of the Treaty concerning mergers of public limited liability companies, OJ 1978 L 295/36, art. 20; now art. 106 of directive (EU) 2017/1132]: 6 That is, the principle preventing shareholders from recovering losses on their investment which are merely the result of the loss that the company sustained due to a wrong done (directly) to it. See De Jong (2013). 7 On the features of derivative actions see Baum and Puchniak (2012), p. 7; See also Zouridakis (2015), p. 272. 8 See Sullivan (1985): ‘Derivative actions have been allowed at least since Atwool v. Merryweather (1867) L.R. 5 Eq. 464n’. 9 Any “popularity” of the remedy should be attributed to shareholders’ derivative litigation in the United States, where it has for decades been the “the chief regulator of corporate management,” [Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548 (1949)]. Notable jurisdictions which introduced derivative actions to their corporate law include Germany (since 2005; Gesetz zur Unternehmensintegrität und Modernisierung des Anfechtungsrechts BGBl I, 2802), Japan, Belgium (since 1991; Lois coordonnées sur les sociétés commerciales art.66bis, of July 26, 1991, Moniteur Belge [MB]), Italy (since 1998; Decreto Legislativo 24 febbraio 1998, n. 58 (It.); Testo Unico in Materia di Intermediazione Finanziaria [TUIF] art.129, D. Lgs. n. 58); and (People’s Republic of) China (since 2005; Standing Comm. Nat’l People’s Cong., October 27, 2005). See also Siems (2012). 10 Gerner-Beuerle et al. (2013), p. 201. 11 On the notion of functional equivalence, see Zweigert and Kötz (1998), p. 40.

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G. Zouridakis The laws of the Member States shall at least lay down rules governing the civil liability, towards the shareholders of the company being acquired, of the members of the administrative or management bodies of that company in respect of misconduct on the part of members of those bodies in preparing and implementing the merger (emphasis added).12

Even though this proviso has some significance in a cross-border context,13 its scope is rather limited to misfeasance directly connected with the (successful) merger and the shareholders of the acquired company as right-holders and beneficiaries of any court order.14 Furthermore, literary interpretation points to granting shareholders a right to enforce their claims, directly; rather than corporate claims, derivatively.15 That is, it allows shareholders to sue in their own name and on their own behalf and be directly compensated by the administrative or management bodies for the diminution of their shares’ value.16 De facto, this is as far as shareholder protection against management’s misconduct related to mergers goes throughout the EU.17 Compared to those rules on claims for civil liability of directors, as they are provided by most MSs, the derivative action differs significantly. Contrary to what could be called “direct personal claims”, which are enforced by, in the name and for the benefit of the shareholder-claimant, the derivative action is representative by nature. This is because any compensation achieved by means of derivative litigation goes to the company, shareholders and other corporate stakeholders being able to enjoy their share of the proceeds only—subsequently—through the company, in the ways prescribed for them; by dividend, share price increase, bonus, increase in salary etc. Thus, the beneficiaries of a successful derivative action are—reflectively-corporate stakeholders in toto,18 whereas the sole beneficiary of a direct personal claim is the claimant himself; at least from a compensation perspective.19

12 This right is usually conferred upon shareholders that disagreed to the proposed merger. It is to be noted here that the early forms of the actio pro socio in Europe resembled this rule, setting the same condition that the litigant disagreed with the decision of the general meeting that the company does not litigate. It is still highly disputed whether those rules conferred shareholders the right to litigate on behalf and for the benefit of the company or not. 13 Concurring Vermeylen and Vande Veld (2012) at 1.128–9; see also directive (EU) 2017/1132, art. 121. 14 Such as “golden parachute” agreements etc. Arguably, this includes implementing the merger for the purpose of frustrating a claim against incumbent directors. 15 See Karagounidis (1997), pp. 386–395, for an analysis on Greek law and comparative law insight. 16 It can be said that the Directive exempts such claims from the universal succession to the benefit of shareholders and debtors; see Karagounidis (1997); whether this was the community legislator’s objective and, if so, whether such objective would be warranted, is debatable. 17 See above (n 2, 12). It is to be noted that within the consultation, stakeholders called for harmonisation of shareholder rights. We read in p. 10 of the summary of responses that: “The rights in order of preference were: to request compensation (70%); right of investigation (46%); and finally, to block the merger (15%, i.e. 12 respondents)”. 18 Arguably, often including the wrongdoers. According to van Aaken (2004), p. 317, derivative actions help internalise externalities and provide a public good. 19 See below, under Sect. 3.4, for a brief explanation of the “deterrent” function of the remedy.

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Granting a right to enforce a direct personal claim to shareholders within the broader ambit of CBMs may thus appeal as attractive in its directness and exclusivity for shareholders, yet it comes with impracticalities and controversies. Absent any mechanism for collective litigation, the court may be faced with a flood of separate claims for the same cause.20 Furthermore, they encounter the difficult task of calculating compensation for each shareholder. Several MSs have come up with solutions applicable to such issues, but arguably even those are flawed in case D&O misfeasance directly harmed only the company (and reflectively its shareholders), in that they provide personal compensation for reflective loss.21 The no-reflective loss principle is by no means merely a relic of company law. It constitutes an expression of the core principle of separate legal personality, ensuring that—when it comes to litigation—the separation of corporate and shareholder property remains intact and the interests of stakeholders are only promoted, en masse, through the company; those are basic and unique features of companies, distinguishing them from associations and other forms of conducting business. Yet, maintaining doctrinal consistency is not always easy. The dividing line between reflective and non-reflective loss (which in turn defines whether a shareholder’s personal claim or a derivative one is in order) is sometimes blurred. This becomes all the more apparent, if one looks at the practice across the Atlantic. Class actions challenging mergers and acquisitions are often followed by derivative actions in the US; and both kinds of proceedings often run there in parallel.22 Furthermore, one may even question the need for strict adherence to the no-reflective loss doctrine, if a merger is involved. On the face of it, it may seem justifiable, if not appropriate, that the no-reflective loss principle is bypassed when the company—the direct right holder—ceases to exist. It could also be argued that, if the acquiring/resulting company enforces the claim, it and its shareholders would benefit from a “windfall”, receiving compensation without having prior sustained any harm. However convincing these arguments may look at first sight, they fail to consider that the disappearing legal person is succeeded by another one, in all its rights and liabilities.23 In (certain) EU jurisdictions, this means that claims, in contract or tort, are part of the universal succession.24 In such cases, there is simply

20

Up to date, class actions are, by and large, unknown in Europe: See Giudici (2009). Appointing special representatives who allocate the proceeds among shareholders. 22 Choi et al. (2017). 23 Concurring the American jurisprudence; we read in Lewis v. Anderson that: 21

[i]f New Conoco were to proceed against Old Conoco’s former management and obtain a recovery, it would not constitute a windfall . . . . New Conoco would be simply pursuing Old Conoco’s assets [i.e., its derivative claims] and minimizing its liabilities. All such assets and liabilities clearly passed . . . to New Conoco. Such choses in action necessarily included the claim asserted by plaintiff in this action (Lewis, 477 A.2d at 1050; see also Laster 2008, p. 687). 24 ‘Biermeyer and Bech-Bruun’ (2013), p. 234: “The UK is not familiar with this concept and due to a lack of clarity multimillion EUR deals have been dropped on this point alone.”

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no good reason why the company resulting from the merger must be deprived of a claim against the administration of the merged company, in order to appease several– not all—disgruntled stakeholders. Certainly, following a successful merger, exceptions to the no-reflective loss principle do not and must not extend beyond the narrow ambit of claims related to misconduct in preparing and implementing the merger. But what about corporate claims falling outside that scope? Does the merger affect shareholder litigation and how? The ensuing paragraphs attend to this topic.

3 Cross-Border Mergers and Pending Derivative Litigation 3.1

General Considerations

Pre-merger misfeasance of the board of directors, is left to national law to be dealt with. The primary issue that arises in a post-merger situation, is that the derivative litigant is deprived of the entity where (s)he derives the right to litigate from; the company ceases to exist. Prima facie, the pending claim becomes impossible to continue. The right-holder disappears and thus cannot receive any court award for damages/compensation. Conceptually, the solution to this impasse could be given by the (universal) succession of assets and liabilities by the acquiring/resulting company,25 which includes the merged company’s claim.26 Still, the derivative litigant initiated proceedings under the capacity of the shareholder of the merged company. In order for the suit to proceed, the law must (be considered as) allow(ing) for that shareholder to continue it as shareholder-representative of the company resulting from the merger, the latter being the successor of the merged company as claimholder.27 Otherwise, another solution to this conundrum would be to permit—expressis verbis—for substitution of the derivative claimant by the company or another shareholder, as several jurisdictions do.28 But even then, the result would be frustratingly the same, According to Directive 2017/1132, art. 119 (2), ‘merger’ means an operation whereby the merged companies transfer all their assets and liabilities to the acquiring/new company (in exchange for the issue to their members of securities or shares and, if applicable, a cash payment); this transfer has been judged to include even contractual choice-of-law clauses (see Case C-483/14 KA Finanz AG v Sparkassen Versicherung AG Vienna Insurance Group [2016] ECLI:EU:C:2016:205, at [57]–[58]). 26 Therefore, if—for whatever the reason—a shareholder brought a derivative claim on grounds that would justify an art. 106 action, the conclusion of the merger would result in the discontinuance of the claim, according to the view that such claims are excluded from the succession (see above, n 14). 27 This issue arises even regarding quasi-derivative actions, such as the Greek “company’s action” (see below under Sect. 3.3) where shareholders may only appoint a special representative to carry proceedings on behalf of the company. 28 Expressly in their company law, such as the German AktG, s. 148(3); or in their civil procedure law, such as Greece (civil procedure code, art. 286). 25

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from the original derivative claimant’s point of view, as (s)he would be deprived of standing. From a certain viewpoint, the continuation of a derivative claim post-merger is hard to reconcile with the rationale behind judicial permission (by virtue of a two-stage procedure29 or not) for shareholders’ legal standing, where applicable. In such cases, permission would have been granted by the court taking into account the situation in one company, yet the court’s intervention—if the shareholder is allowed to continue the claim—would eventually affect (the internal affairs of) another.30 However, it could equally be argued that no absurdity is involved. The merged company could be viewed as surviving through the acquiring/resulting one, whilst the shareholder-claimant becomes a member of the latter corporate entity.31 Whereas, changes in shareholder ownership (the derivative claimant’s notwithstanding) and board constitution do not normally affect the course of proceedings, absent a merger. There seems to be no compelling argument why such changes should, on their own, constitute grounds for the action’s dismissal, if they are attributable to a broader corporate “transformation”, such as a merger. That said, the complexity of the law on derivative actions requires closer examination of the merger’s effects on pending litigation. Across the Atlantic, the “continuous ownership” requirement and its satisfaction post-merger have constituted the major obstacle for the continuation of a derivative action and the subject of both varying lines of case law and significant academic debate. As the following paragraphs illustrate, this topic is relevant to the EU MSs, where restrictive criteria of continuous ownership often apply.

3.2

The Impasse (?) Created by the Continuous Ownership Requirement

In many jurisdictions, the law on derivative actions provides for the requirement that shareholders maintain throughout litigation a proprietary interest in the company during the litigation. This condition for locus standi is known as the “continuous ownership” requirement and its rationale aims to preclude shareholder-litigants’ moral hazard and ensure that derivative claimants pursue what essentially is their

29

As provided by the laws of the UK, Ireland and Germany for instance. In the UK for instance, the court—exerting continuing oversight on the derivative claim throughout its course—has, at the “second stage”, to consider several factors before allowing a derivative claim to proceed, including the views of other members on the matter of litigation, whether the company decided not to take action and, most importantly, whether the action would conform to the interests of the company. It is possible that bringing a derivative claim would accord to the merged company’s interests but continuing it would run against those of the acquiring company. 31 Concurring Tseng and Wen (2012), p. 220. 30

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company’s claim with adequate zeal.32 Even though this rationale is sound and keeps in line with the “derivative” nature of the remedy, the respective rule may lead to inequitable results. Shareholders may be led to involuntary divestiture of their shares and thereby lose membership and the proprietary interest necessary for continuing with the action. Furthermore, the “continuous ownership” requirement is often coupled with the extra requirement—applicable in in most EU MSs—of ownership of a certain percentage (on aggregate) of shares, that exceeds a minimum threshold set by law.33 These, if not fulfilled at any point within the course of litigation, could result in the derivative proceedings coming abruptly to a halt. Therefore, even in case that the successor company is, by law, entitled to enforce the merged company’s claim, the shareholders of the merged company may be estopped from continuing litigation on its behalf, despite them becoming its members via the share exchange. If their shareholdings were close to the minimum threshold when the claim was initially brought, then, due to the exchange of shares in lieu of the merger, they would fall below that threshold post-merger; and lose legal standing.34 Minimum shareholding thresholds are set by many jurisdictions within the EU, yet the law—be it statute or case law—is hardly ever clear on whether this requirement needs be satisfied throughout the course of proceedings.35 Given the ambiguity surrounding most jurisdictions imposing minimum shareholding thresholds, the big question would be whether this criterion is an ongoing one and, if so, whether a diminution of the derivative claimant’s shareholding due to the merger should deprive him/her of the right to litigate on behalf of the company. To answer that, one should first inquire the purpose that the minimum threshold attempts to serve.36

32 See on the topic from an American perspective Eaton et al. (2010), Milani (1986), and Laster (2008). See also the decisions in Gaillard v. Natomas Co., 173 Cal. App. 3d 410, 219 Cal. Rptr. 74 (Cal. App. 1985); Grosset v. Wenaas 35 Cal. Rptr. 3d 58 (Cal. Ct. App. 2006), rev. granted, 38 Cal. Rptr. 3d 609 (Jan. 4, 2006), aff’d, 72 Cal. Rptr. 3d 129 (Feb. 14, 2008). See also Passias (1969), p. 695; Cox and Thomas (2009), p. 354. 33 Quorum requirements for derivative actions and functionally equivalent remedies are placed in the laws of Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France (as per the action sociale ut singuli of the Commercial Code), Germany, Greece, Hungary, Italy, Latvia, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden. 34 Similarly, Tseng and Wen (2012), p. 226. 35 The “coupling” of the two requirements has, for example, been a topic of debate in Italy and Greece; see Latella (2009), p. 319. Interestingly, the European Model Company Act, s. 11.37 (available at http://law.au.dk/en/research/projects/european-model-company-act-emca/, accessed on 7 January 2018) does not set a quorum requirement for legal standing in derivative actions; yet, in order to satisfy one of the conditions for the right to sue derivatively, a 10% threshold is in place: “If shareholders that represent not less than one-tenth of the share capital oppose any resolution to grant exemption from liability or waive the right to take legal action, any shareholders can commence legal proceedings [. . .]”. Unambiguously, this 10% minimum is condition precedent. 36 Provided that the legal system allows for teleological/purposive interpretation of the law (statutory construction).

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The common ground among jurisdictions that provide for the continuing ownership rule coupled with a shareholding percentage threshold, is that they purport to filter frivolous and vexatious suits in such a way, by limiting derivative claimants to those that maintain a significant financial stake in the company. The idea is simple: a predatory shareholder would not purchase and maintain stock of substantial value in order to litigate an unmeritorious suit; either because that would be unaffordable, or because the financial risk involved would be too big when weighed against the prospect of personal (not corporate) gain, via a settlement or otherwise.37 Yet, the set fixed share ownership threshold is simplistic and arbitrary: it is not, and cannot be tailored for companies of different size, cannot reflect intra-corporate dynamics, making it thus too easy for malevolent shareholders to interfere when it is cheap to do so and too hard for anyone to champion the company’s interests when it is expensive.38 In any case, by posing quorum requirements, the law, even where it is poorly drafted,39 has the clear purpose that the derivative claimant stands to lose private property if the case is lost and corporate property is harmed.40 This goal would be frustrated if the shareholding threshold is merely condition precedent.41 It would mean that a “professional litigant” could buy a proportion of the company’s shares which would meet the requirement, sue vexatiously; and then do away with any risk by nimbly selling all purchased shares but one, before proceedings even getting close to reaching completion. But there is no apparent reason why both the continuing ownership rule and an ongoing minimum shareholding requirement should apply, where the shares’ exchange rate in a merger was the exclusive cause of diminution of the derivative claimant’s shareholding. In such cases, provided that the derivative claimant exchanged shares of a value that would allow standing on behalf of the merged company had the merger not happened, the right to litigate must be sustained.42 It simply makes no sense to demand that a minority shareholder increases his/her financial stake in a (successor) company (or, for that matter, to demand that he/she 37

Paul (2010), p. 104. Gelter (2011–2012), p. 857; Giudici (2009), pp. 250–251. 39 For instance, ambiguity surrounds Greek law (and its quasi-derivative action) and Italian law on whether the criterion is an ongoing one; see Giudici (2009), p. 251; Delikostopouos and Sinaniotis (2000). Other MSs adopt a clearer position on the subject; in Slovenia “shareholders filing the lawsuit in accordance with the previous paragraph must deposit the shares with the central clearing and depository house if they have not been deposited or issued in the book entry form and may not dispose of them until the issue of a final decision on the claim, or it shall be deemed that the lawsuit has been withdrawn” (annex to Study on Directors’ Duties and Liability, p. 801). 40 Also in the US; see Milani (1986): “Courts have asserted that the continuous ownership requirement is necessary because the policy behind the standing rules for rule 23.1 requires that a plaintiff maintain a proprietary interest in the corporation while the derivative action is pending.” 41 There are arguments in favour of this application of share ownership minima; see Paul (2010), p. 106. 42 The same applies, pari passu, for the shareholders of the acquiring company in an inverted scenario. 38

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coalesces with a fellow shareholder), so that satisfaction of a threshold for legal standing in derivative proceedings is maintained, when falling below such threshold is attributable to such extraneous factors.43 This position is clearly distinguishable from the ill-advised wholesome rejection of the continuous ownership rule. Vindicating corporate rights should be viewed not only as a shareholders’ privilege, but also as responsibility44; doing away with continuous ownership would run against such perception of the remedy, to the favour of rogue shareholders and strike suits. Once the plaintiff divests his/her membership status and any personal proprietary interest in the outcome of litigation, the risk of moral hazard comes to the fore; (s)he is not to be expected to act responsibly enough, when only “other people’s money” is at stake. However, on balance and provided that the continuing ownership rule is observed, giving permission to shareholders to continue as claimants, post-merger, despite falling below the otherwise applicable quantitative thresholds, is preferable to discontinuation of (derivative) proceedings. The risk of abuse, if such permission is not granted, was succinctly pronounced in Gaillard v. Natomas, by the California Court of Appeal: To hold that a merger has the effect of destroying such causes of action would be tantamount to giving free reign to deliberate corporate pilfering by management and then immunizing those responsible from liability by virtue of the merger which they arranged. This would be a grossly inequitable result.45

Nevertheless, even though the obstacle of continuing ownership could—and should—be dealt with, at least at state level, the cross-border element in a CBM further complicates the progress of a pending derivative claim post-merger. We now turn to this topic.

3.3

Conflict of Laws

Private international law considerations further complicate the issue of pending derivative actions post-CBMs. From a purely procedural law point of view, a derivative claimant stands before court in a quasi-representative capacity, under 43 This is clearly distinguishable from the ordinary capital increase, where a pre-emption right applies. 44 See also White v. Banes Co 866 P.2d 339 (N.M. 1993). 45 (n 33). Despite the decision being superseded by Grosset v. Wenaas (n 33) in California, some 21 years later, it has influenced the case law of other States, such as North Carolina [see Alford v. Shaw 398 S.E.2d 445 (N.C. 1990)], to reject continuous ownership as requirement for derivative actions; other States, such as Delaware, strictly follow the continuous ownership rule though; see Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984). It is to be noted that, even as per Grosset v. Wenaas,

equitable considerations may warrant an exception to the continuous ownership requirement if the merger itself is used to wrongfully deprive the plaintiff of standing, or if the merger is merely a reorganization that does not affect the plaintiff’s ownership interest.

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the conditions set by law. Yet, the right to sue on behalf of the company is a shareholders’ decision right (“voice”), and—as such—constitutes substantive company law.46 What if the company law of the acquiring company does not let shareholders litigate on behalf of the company? If the law of the acquiring company applies, as lex societatis47 (instead of the lex fori),48 then the court would be bound to check, in response of a demurrer pled by defendants or otherwise, the propriety of the company’s representation; and rule that the derivative claimant is dismissed.49 To illustrate, let us consider the example of an English company being merged by acquisition with an Estonian company. Suppose further that a shareholder applied successfully for permission to continue a derivative claim under Pt 11 of the CA 2006, before an English court and prior to the merger. Under Estonian law, no derivative action is provided; whilst, it is common ground that Pt 11 does not apply to overseas companies.50 Ex hypothesi, in subsequent stages of the proceedings, the claimant may be disqualified, as (s)he now is shareholder of the successor foreign company. But even in case the derivative action was brought under English common law,51 it is settled case law that the lex societatis (in this case, the law of incorporation) applies regarding the right to sue on behalf of the company.52 The derivative litigant in this example would have become a member of a company incorporated in a jurisdiction not conferring this “procedural stewardship” role to shareholders. Not that remedies functionally equivalent to derivative actions would fare any better on such application of private international law. Under Greek company law, shareholders of a Greek company holding 5% of the company’s share capital may achieve the appointment, by court order, of a special representative with the mandate to enforce the company’s claim against its misfeasant directors.53 A merger resulting to a company incorporated in a jurisdiction where the institution of the “ad hoc” 46 On the distinction between substance and procedure in private international law see Carruthers (2004), p. 694. 47 In accordance with EC decisions, this would be the law of the state of incorporation; see Zhang (2014), p. 226. 48 The lex fori could still apply under the public policy doctrine; see Rotem (2013), pp. 340–342. 49 This might not always be the case; see Rotem (2013), pp. 349–355. 50 Joffe et al. (2011), p. 36. 51 On which the laws of other MSs (such as Cyprus and Malta) are modelled after; derivative actions may be brought instead of the UK CA 2006 Pt 11 derivative claim with respect to “multiple” derivative suits. 52 In Konamaneni v Rolls-Royce Industrial Power (India) Ltd (2002) 1 WLR 1269, per Mr Justice Lawrence Collins, at 50:

They confer a right on shareholders to protect the value of their shares by giving them a right to sue and recover on behalf of the company. It would be very odd if that right could be conferred on the shareholders of company incorporated in a jurisdiction which had no such rule, and under which they had acquired their shares. The lex fori could apply to other facets of the derivative action though; see, Base Metal Trading Ltd v Shamurin (2004) EWCA Civ 1316; (2005) 1 WLR 1157, Garnett (2012) at 5.36–39. 53 Law 4548/2018, arts 104–106.

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special representative does not exist, could cause the disqualification of the appointed special representatives, on application of the lex societatis. Would that mean that the claim would be discontinued? Not necessarily. There is no case law on the matter, yet the civil procedure code provides that, upon succession (including mergers), the successor/acquiring company continues pending litigation in its own name; the law makes no distinction between domestic and cross-border mergers. The last observation begs the question of whether it is pertinent that a pending derivative claim (or functionally equivalent remedy) survives the merger as such. The ensuing paragraphs elaborate further.

3.4

Is It That Important to Allow Derivative Litigants to Continue Their Claim Post-merger?

Being a representative action by its nature, the derivative action aims to provide compensation for all corporate stakeholders. But also—and fundamentally so—the derivative action purports to deter managerial misfeasance, by means of punishment.54 Deterrence can only work if the probability and the magnitude of the threat of expected liability is big, should management decide to engage in wrongdoing, as well as if the actual ex post liability for the total harm they cause is measurable.55 Therefore, from the perspective of deterrence, discontinuing a claim against wrongdoers, only because a CBM takes place, is apparently a bad strategy, as it would restrict the prospects of liability enforcement or credible threat thereof. So is discouraging shareholders to bring a derivative action; it would be disheartening for anyone to invest money and effort to sue, only to lose legal standing afterwards for reasons beyond their reach. The more unattractive the remedy, the fewer persons available to materialise the threat to wrongdoers. As regards, compensation, it was illustrated above in Sect. 2 that the derivative action is a tool for collective redress. But how important is it for a shareholder to continue championing stakeholders’ interests? The valuation of the merged company and the share exchange ratio would consider the (pending) claim. Semble, shareholders acting as derivative litigants would lose interest in continuing proceedings, since the number of shares they get in the successor company (and the cash payment, if applicable) would reflect the expected corporate compensation, way in advance of its materialisation. Indeed, it may seem as a moot point that shareholders may continue or ever proceed to corporate litigation in order to achieve corporate recovery after a merger. This is a valid observation regarding most shareholders, especially those looking for short-term profit. But the derivative action, by design or default, is suitable for

54 55

Reisberg (2007), p. 51; Coffee (1985), p. 10. Ibid.

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activists, not short-termists.56 The continuing ownership rule applying, this is all the most apparent; until the suit comes to fruition, the claimant must remain shareholder, something that may take years of patience. But even this rule notwithstanding, derivative proceedings often involve expenses on the part of the shareholderclaimant, which run contrary to the short-termist culture. Therefore, for shareholders that intend to remain at the company post-merger, continuing their derivative claim may be a rational decision, notwithstanding any legal repercussion for quitting a claim, for which enough time, money and effort have been already spent anyhow. Last but not least, the shareholder-litigant may face a reflective decrease in share value if the claim is lost, whether due to successor company’s indifference or due to other reasons, such as prescription. Of course, in the case of inertia at board level, the company may turn against those liable for losing or waiving the claim, but this could sometimes be hard to do; and would anyways require that a suit is filed afresh and lengthy proceedings commence.57 Even worse, if the directors are in breach of duty for not enforcing the company’s claim against the merged company’s administration, they are not to be expected to initiate proceedings against themselves either. Such indifference, culpable or not, is relevant not only to pending derivative actions, but also to those brought after the merger concluded, for a cause of action pre-dating the latter. The following paragraphs elaborate, inter alia, on the intricacies involved in such, postmerger shareholder litigation.

4 Post-merger Derivative Actions Enforcing a claim of the merged company that is not pursued before the merger took place meets with several difficulties too. Even though the company resulting from the merger may enjoy locus standi regarding the claim against the merged company’s directors (on the condition that it is included within the notion of “transferrable assets”), that—in itself—does not ensure the shareholders’ (whether “old” shareholders of the merged companies, or new ones) ability to sue those persons on its behalf. The intricacy involved in a post-cross-border merger situation is that the acquiring company would be incorporated in—and/or be subject to the jurisdiction of—a MS different to that of the merged company (and, spatially, different to the MS wherein misfeasance against the merged company occurred). Therefore, as illustrated in Sect. 3.3, the possibility arises that the lex societatis of the acquiring/

56 Activists may include even environmental or other lobby groups. See Puchniak and Nakahigashi (2012), p. 7. 57 See also Laster (2008).

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resulting company does not allow for derivative actions.58 This could be a stumbling block for aspiring derivative litigants, as the ability to litigate on behalf of the company—not the claim itself—is an “internal” corporate matter, concerning the relations between shareholders and the company.59 Hence, under the prevailing opinion, the lex societatis applies regarding the shareholder’s legal standing, independently of the law applicable to the claim (of the company) itself or the forum before which the latter is brought.60 Of course, such choice of law would eliminate the possibility for any derivative claim to be brought by shareholders, irrespective of defendants or cause of action. The implications of the choice of law go further than that. Even if the acquiring/ resulting company’s law allows for derivative actions, it might place certain restrictions, alien to the law of the merged company, which could comparatively limit the protection afforded previously to the merged company’s shareholders. Those restrictions could extend beyond the continuing ownership rule and the ongoing minimum shareholding requirement. To begin with, derivative actions are usually constructed in a way that the scope of defendants is restricted to corporate D&O.61 Third parties normally fall outside their scope,62 unless—under the laws of some jurisdictions—they were accomplices to the complained wrongdoing.63 Evidently, a corporate migration via merger could substantially limit the scope of defendants. In such instances, the only possibility for redress would be that, in case the incumbent directors unduly refrain from pursuing the claim, shareholders turn against them for breach of duty via a derivative suit.64

58 The reverse is, of course, also possible. In such a case, it is conceivable that even post-merger shareholders may file a derivative claim (the law of the acquiring or new company so permitting) against the directors of the merged company(ies), should the claim be actionable by the acquiring/ resulting company; they would just so enforce the latter’s rights. Nevertheless, it must be reminded that it is the merged companies’ board and controllers who principally select the destination jurisdiction. 59 It is important to note here that such matters normally fall within the exception of art. 1 (2)(f) of the Rome 1 Regulation. 60 Rotem (2013). Note that the choice of law applicable to the claim itself, as long as it concerns director’s breach of duty (as usually happens with causes of action in derivative litigation), normally falls within the exception of art. 1 (2)(f) of the Rome 1 Regulation too. 61 Baum and Puchniak (2012), p. 7. 62 The problem for an aspiring derivative shareholder post-merger could also be that the directors of the merged company are considered as third persons vis-a-vis the acquiring company; depending on one’s perception of the scope of succession via merger. 63 The German AktG, s. 148 provides for such possibility, as does the UK CA 2006 Pt 11; in Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch); [2010] B.C.C. 420, 438-9, per Lewison J.: “[a] claim against a person who had dishonestly assisted in a breach of fiduciary duty or who had knowingly received trust property would be paradigm examples”. 64 Exceptions apply. For instance, under English common law and following a very recent decision by the Commercial Court, shareholders may be able to sue a third party for specific performance, so that compensation/damages go to the company and the reflective loss principle is observed; see Latin American Investments Ltd v Maroil Trading Inc and Anor, 2017 EWHC 1254 Comm. There

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Another restriction, common in the US but also applicable to certain EU MSs, is that of contemporaneous ownership; that is, the requirement for legal standing that derivative claimants were members of the company when misfeasance occurred.65 A move to a jurisdiction where contemporaneous ownership applies would significantly curtail the scope of potential derivative plaintiffs, as compared to that before the merger; to the detriment of liability enforcement. Not only it would constitute a move to a jurisdiction where “new” shareholders in the resulting company are unable to sue derivatively, but it would also deprive part of the shareholders of the merged company of a right they previously enjoyed. Furthermore, the issue of costs allocation is a decisive factor in shareholders’ derivative litigation. In view of the minimal and uncertain return shareholders get from enforcing the company’s claim, many states curb the generally applicable loser—pays principle.66 A move to a jurisdiction that does not provide for exceptions or indemnity for costs67 would place a comparatively excessive burden on the shoulders of the shareholder championing the company’s interests, rendering the derivative action an unattractive prospect, to say the least. The considerations above point to the dreadful possibility of a race to the bottom, with corporate management and controllers arranging the company’s migration—via merger—to the least protective destination. Together with the restrictions on the scope of derivative actions and the issues involved in continuing pending litigation (as illustrated in Sect. 3), they paint a grim picture of post-merger shareholder protection against directors’ misfeasance within the EU. This conclusion echoes the fears expressed in Gaillard v. Natomas; wrongdoing D&O can immunise themselves by arranging a merger, as long as it is a cross-border one. Below are some thoughts on how these issues could be addressed.

5 Conclusions and Some Thoughts on the Way Forward Going back to the fundamentals of the derivative action, its ratio legis can be summed up within the words of Lord Davey in Burland v Earle: “[t]his [. . .] is mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress”.68 As illustrated above, there are certainly several situations within the context of CBMs where a wrong to the company and its stakeholders might be left unremedied.

is an important qualification to this right though; the shareholder-claimant can only sue if (s)he had herself/himself a cause of action. 65 Or when they knew or ought to have known about the misfeasance; see German AktG, s. 148 (1). 66 Chen (2017) and Kalss (2009). 67 Such as Bulgaria, Croatia or Finland (according to the 2013 study of Gerner-Beuerle et al. 2013, p. 204). 68 (1900-3) All E.R. 1452.

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As regards pending derivative litigation, a CBM may often lead to the result that proceedings are discontinued (as derivative ones), for reasons beyond the claimant’s control. This would be quite inequitable; the shareholder-litigant, despite having filed a suit fulfilling the criteria for legal standing before the competent forum under his/her company’s national law, faces dismissal because his/her shareholding percentage and the applicable law changed due to the merger. This migration could constrain aspiring litigants regardless of whether they filed their claim prior to the CBM or not, if the destination is a jurisdiction offering lower shareholder protection.69 There appears to be no compensation for their exposure to a higher risk of oppression and corporate misfeasance at board level. The assessment on the exchange ratio would not consider the fact that shareholders of the merging company are short-changed protection-wise. Granting shareholders with an appraisal right would thus not appease the loss in protection suffered. How to address such issues? Legislators and judges may turn to the rich American jurisprudence on derivative actions for insight, which has on occasions proved valuable, even regarding CBMs.70 For instance, regarding the application of the continuous ownership rule, American courts have fashioned exceptions to the continuous ownership requirement, if the merger itself is used to wrongfully deprive the plaintiff of standing, or if the merger is merely a reorganization,71 not affecting the plaintiff’s ownership interest.72 Yet, the differences with US and EU (MSs’) merger law, even on fundamentals such as the cessation of the acquired company’s existence, are not to be overlooked. Ideally, from an activist’s point of view, full harmonisation towards a regime that provides for derivative actions that extend to foreign companies would be introduced. This seems rather utopic at an EU level at this point. EU law has not dealt with the matter of derivative suits at all, let alone regulate their interaction with CBMs.73 Consultation showed that shareholder protection may be one of stakeholders’ concerns, yet derivative litigation was not raised as a point.74 The only (soft-law) instrument that aims to bring—or, at least, encourage—some uniformity

69 It is to be noted here that the analysis herein bears relevance to other forms of corporate migration, such as cross-border conversions; see Case C-106/16 Polbud—Wykonawstwo [2017] ECLI:EU: C:2017:804, Commission, ‘Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions’, COM (2018) 241 final, art 1 (3). 70 As happened, for instance, in Konamaneni v Rolls-Royce Industrial Power (India) Ltd (2002) 1 WLR 1269, where Mr Justice Lawrence Collins considered Batchelder v. Kawamoto, 147 F. 3d 915 (9th Cir. 1998) regarding the question of the law applicable to the derivative action. 71 Note that a significant number of CBMs in the EU constitute part of intra-group restructurings; see Biermeyer and Bech-Bruun (2013) Main Findings-18. 72 Peyerwold and St. Lawrence (2017), at 5.72; Grosset v Wenaas (2008) 42 C4th 1100, 1119 (dicta); Haro v Ibarra (2009) 180 Cal. App. 4th 823, 103 Cal. Rptr. 3d 340. 73 The now abandoned Draft Fifth Company Law Directive, in its 5th proposal, third revision, art. 16, provided for a shareholders’ remedy though. 74 See (n 5).

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on shareholder litigation on behalf of the company, at the moment, is the European Model Company Act (EMCA). The relevant proviso therein has both attractive and unattractive features for shareholder activists; for the purposes of this paper, suffice to note that it confers an individual right to sue derivatively and thus avoids some of the issues analysed in Sect. 3. Time will only tell how many MSs will voluntarily adopt the EMCA derivative action and how the latter will operate in the CBM context. Furthermore, an EU intervention on private international law would have a critical effect on derivative litigation. The choice of the lex fori instead of the— more doctrinally appropriate, at least regarding several aspects of derivative actions—lex societatis, would have its merits and demerits. On the one hand, it could mean that a merger does not deprive minority shareholders of their right to sue derivatively. On the other hand, it would enable predatory litigants’ forum shopping and hence open the floodgates wider than some jurisdictions would prefer to.75 It is to be noted, however, that considerations on forum shopping are largely irrelevant to derivative actions pending at the time a CBM is effected; minority shareholderclaimants normally do not solicit the merger and the ensuing share exchange.76 Therefore, within the context of CBMs, it would only be fair that a cause of action which antedates the merger could be litigated derivatively under the law of the merged company (which would, in most cases coincide with the lex fori), the lex societatis of the resulting company not affecting the shareholders’ legal standing or the procedure in general. For sure, the above-mentioned solutions require radical legislative and judicial intervention, one that may not be justified by many due to the negligible numbers of derivative actions brought in Europe.77 However, (in)frequency is not (in)significance. This remedy is a fail-safe mechanism of corporate governance and, as such, it is meant to be invoked rarely; the contrary would indicate abuse. EU MSs recognise the importance of the remedy within the system of corporate checks and balances and most have either introduced the derivative action to their laws or revised their respective provisions in the past two decades. Ensuring that a merger does not render the remedy useless would be the next step towards this direction of enhancing corporate accountability.

75 76

For an analysis on private international law, see Zhang (2014), pp. 220–250. Similar conclusion by Rotem (2013), p. 358: The most important policy consideration without a doubt focuses on giving investors— for better or worse— what they bargained for. [. . .] However, this consideration may take a wholly different form if parties do not actually demonstrate consent, for example, if the plaintiffs are involuntary creditors

77 Gelter (2011–2012), discusses in length the rarity of derivative suits in Europe and the reasons behind it.

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References Baum H, Puchniak D (2012) The derivative action: an economic, historical and practice-oriented approach. In: Puchniak DW, Baum H, Ewing-Chow M (eds) The derivative action in Asia: a comparative and functional approach. Cambridge University Press, Cambridge Biermeyer T, Bech-Bruun, Directorate-General for the Internal Market and Services (European Commission) and Lexidale (2013) Study on the application of the cross-border mergers directive. The European Union, Brussels Carruthers JM (2004) Substance and procedure in the conflict of laws: a continuing debate in relation to damages. Int Comp Law Q 3:691–711 Chen W (2017) A comparative study of funding shareholder litigation. Springer, Singapore Choi SJ, Erickson J, Pritchard AC (2017) Piling on? An empirical study of parallel derivative suits. J Empir Leg Stud 14:653–682 Coffee J Jr (1985) The unfaithful champion: the plaintiff as monitor in shareholder litigation. Law Contemp Probl 48:5–81 Cox J, Thomas R (2009) Common challenges facing shareholder suits in Europe and the United States. Eur Company Financ Law Rev 6:348–357 De Jong B (2013) Shareholders’ claims for reflective loss: a comparative legal analysis. Eur Bus Organ Law Rev 14:97–117 Delikostopouos I, Sinaniotis LD (2000) Mi peraitéro stírixi ton eidikón ekprosópon anónymis etaireías sto 1/3 tou metochikoú kefalaíou tis, Diki 990 Eaton M, Feldman LJ, Chiang JC (2010) The continuous ownership requirement in shareholder derivative litigation: endorsing a common sense application of standing and choice-of-law principles. Willamette Law Rev 47(1):1–24 European Model Company Act. http://law.au.dk/en/research/projects/european-model-companyact-emca/. Accessed 7 Jan 2018 Feedback statement—summary of responses to the public consultation on cross border mergers and divisions—October 2015, p 9. http://ec.europa.eu/internal_market/consultations/2014/crossbordermergers-divisions/docs/summary-of-responses_en.pdf. Accessed 7 Jan 2018 Garnett R (2012) Substance and procedure in private international law. Oxford University Press, Oxford Gelter M (2011–2012) Why do shareholder derivative suits remain rare in continental Europe? Brooklyn J Int Law 37:843 Gerner-Beuerle C, Paech P, Schuster EP (2013) Study on directors’ duties and liability. http://ec. europa.eu/internal_market/company/docs/board/2013-study-analysis_en.pdf. Accessed 7 Jan 2018 Giudici P (2009) Representative litigation in Italian capital markets: Italian derivative suits and (if ever) securities class actions. Eur Company Financ Law Rev 6:246–269 Joffe V, Drake D, Richardson G, Collingwood T, Lightman D (2011) Minority shareholders: law, practice and procedure. Oxford University Press, Oxford Kalss S (2009) Shareholder suits: common problems, different solutions and first steps towards a possible harmonisation by means of a European model code. Eur Company Financ Law Rev 6:324–347 Karagounidis A (1997) The anomalous merger and division of public limited companies. Sakkoulas, Athens Laster T (2008) Goodbye to the contemporaneous ownership requirement. Del J Corp Law 33:673–694 Latella D (2009) Shareholder derivative suits: a comparative analysis and the implication of the European shareholders’ rights directive. Eur Company Financ Law Rev 6:307–323 Milani LM (1986) The continuous ownership requirement: a bar to meritorious shareholder derivative actions? Wash Lee Law Rev 43(3):1013–1031 Passias I (1969) To Díkaion tis Anonýmou Etaireías. Athens

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Paul C (2010) Derivative actions under English and German corporate law –shareholder participation between the tension filled areas of corporate governance and malicious shareholder interference. Eur Company Financ Law Rev 1:81–115 Peyerwold D, St. Lawrence S (2017) Counseling California Corporations, 3rd edn [update]. CEB, Oakland Puchniak DW, Nakahigashi M (2012) Japan’s love for derivative actions: irrational behavior and non-economic motives as rational explanations for shareholder litigation. Vanderbilt J Transnat Law 45:1–82 Reisberg A (2007) Derivative actions and corporate governance: theory and operation. Oxford University Press, Oxford Rotem Y (2013) The law applicable to a derivative action on behalf of a foreign corporation— corporate law in conflict. Cornell Int Law J 46:321–360 Siems MM (2012) Private enforcement of directors’ duties: derivative actions as a global phenomenon. In: Wrbka S, Van Uytsel S, Siems MM (eds) Collective actions: enhancing access to justice and reconciling multilayer interests? Cambridge University Press, Cambridge, pp 93–116 Sullivan GR (1985) Restating the scope of the derivative action. Camb Law J 44:236–255 Tseng WR, Wen W (2012) Derivative actions in Taiwan. In: Puchniak DW, Baum H, Ewing-Chow M (eds) The derivative action in Asia: a comparative and functional approach. Cambridge University Press, Cambridge van Aaken A (2004) Shareholder suits as a technique of internalization and control of management: a functional and comparative analysis. RabelsZ 68:288–327 Vermeylen J, Vande Veld I (2012) European cross-border mergers and reorganisations. Oxford University Press, Oxford Zhang H (2014) Directors’ liability from the perspective of private international law. PhD thesis, Universitat Autònoma de Barcelona, Barcelona Zouridakis G (2015) Introducing derivative actions in the Greek law on public limited companies: issues of legal standing and lessons from the German and UK experience. Int Company Commercial Law Rev 26:271–283 Zweigert K, Kötz H (1998) An introduction to comparative law (trans: Weir T), 3rd edn. Oxford University Press, Oxford

Georgios Zouridakis is a graduate of the Democritus University of Thrace (DUTH), Greece. After his LLB, he completed an LL.M in European Business Law (PALLAS) at the University of Essex, UK. He was awarded his PhD, on the subject of comparative corporate law, with scholarship by the University of Essex. He has been publishing his academic work with English, French and Greek publishers. He is currently a research fellow at the Athens Institute for Education and Research (ATINER) and a practicing lawyer in Athens, Greece, specialising in commercial law cases.

Part II

Cross-Border Mergers in European Company Law: Analysis in the Context of Various Areas of Law

Disclosure of Inside Information in Cross-Border Mergers Vassilios D. Tountopoulos

1 Introduction The public disclosure of inside information pursues a twofold goal: (a) to inform shareholders and investors by enhancing market transparency and (b) to protect the integrity of the market by preventing insider dealing.1 These two goals have complementary functions, as both market transparency and market integrity are essential prerequisites for the smooth functioning of the market.2 Moreover, public disclosure and insider dealing are closely interrelated. Then, public disclosure deprives the information of its inside character and whiteout inside information there is no room for insider dealing. At the European level, the public disclosure was originally considered mainly to be a means to inform investors.3 However, directive 2003/6 (Market Abuse Directive, known as MAD) has introduced a change in paradigm.4 The disclosure of inside

1 See generally on the aim of public disclosure von Klitzing (1999), p. 47; Assmann (2012), § 15, para 27; Pfüller (2016), § 15, para 50; Koch (2017), p. 348; Klöhn (2014), vor § 15, para 34; Davies and Worthington (2016), p. 868; Gullifer and Payne (2015), p. 550. 2 Koch (2017), p. 348. 3 The ad hoc disclosure obligation was used to be annexed in the Directive 79/279/EEC of 5 March 1979 coordinating the conditions for the admission of securities to official stock exchange listing (OJ 1979, L 66/21) and was later transferred to Art. 68 and 81 of Directive 2001/34 of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities (OJ 2001, L 184/1). See generally von Klitzing (1999), p. 29. 4 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), OJ 2003, L 96/16.

V. D. Tountopoulos (*) University of the Aegean, Chios, Greece e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_6

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information has been mainly considered a way to prevent insider dealing.5 This view is fully endorsed in Market Abuse Regulation (MAR).6 In the Preamble of MAR, the public disclosure of inside information is recognised as an essential means to avoid insider dealing and ensure that investors are not misled.7 Accordingly, and subject to the exceptions laid down in Art 17(4) of MAR, an issuer is obliged to inform the public as soon as possible of inside information that directly concerns him.8 The inside information is defined in Art. 7(1)(a) of MAR. According to the latter, inside information has four obligatory elements: (1) the information must be of a precise nature; (2) the information must not have been made public; (3) it must relate, directly or indirectly, to one or more financial instruments or their issuers; and (4) it must be information that, if it were made public, would likely have a significant effect on the prices of those financial instruments or the price of related derivative financial instruments.9 Art. 7 (1)(a) of MAR echoes the relevant provisions of the previous legal regime, i.e., MAD. However, the interpretation of the relevant provisions of MAD referring to the definition of inside information (and accordingly its disclosure) in multistage events and protracted processes such as Mergers & Acquisitions (M&A) has always been a hotly debated issue in European capital market law. This issue has been referred to the European Court of Justice (ECJ) in the Geltl Case.10

2 The Geltl Case In the Geltl case, the Court was asked to interpret one of the four elements of the notion of inside information. More specifically, the Court had to decide whether an intermediate step in a protracted process might in itself constitute information of a precise nature. The Court was not asked to define other elements of the inside See recital 24 of MAD: ‘Prompt and fair disclosure of information to the public enhances market integrity, whereas selective disclosure by issuers can lead to a loss of investor confidence in the integrity of financial markets.’ See also Case C-45/08, Spector Photo Group and Van Raemdonck, EU:C:2009:806, para 47; Case C-445/09, IMC Securities, EU:C:2011:459, para 27; Case C-19/11, Markus Geltl v Daimler AG, EU:C:2012:397, para 33; C-628/13 Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 21. 6 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/ 72/EC, OJ 2014, L 173/1. 7 See recital 49 of MAR. 8 See Art. 17(1) MAR. 9 See also Case C-19/11, Markus Geltl v Daimler AG, EU:C:2012:397, para 25 and Case C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 24, referring to MAD. 10 Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397. See on this case Krause and Brellochs (2013a), p. 283; Hellgardt (2013), p. 861; Klöhn (2012), p. 1885; Möllers and Seidenschwann (2012), p. 2762; Papadopoulos (2012), p. 257. 5

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notion, such as when an information would be likely to have a significant effect on the prices of a financial instrument in the eyes of a rational investor. Thus, this question remained unanswered. The facts of the Geltl case refer to the resignation of the Chief Executive Officer of DaimlerChrysler (Mr. Schrempp).11 More specifically, Mr. Schrempp announced to other members of the Board his intention to resign before the expiry of his mandate. Τhe relevant decision of the Supervisory Board of DaimlerChrysler referring to his replacement was made some weeks after the announcement and was immediately made public. The question was whether a disclosure was necessary when a member of the board conveyed his intentions to resign or when a member of the Board was replaced. In this question, the German courts delivered contradictory judgements.12 Some courts considered that the disclosure was timely made,13 while others considered that the disclosure had to be made when the member of the Board conveyed his intentions to resign.14 In the Geltl case, the ECJ held that an intermediate step in a protracted process might in itself constitute a set of circumstances or an event in the meaning normally attributed to those terms.15 According to the Court, that finding is supported by Article 3(1) of Directive 2003/124, which gives, through examples of inside information, the disclosure of which may be delayed under Article 6(2) of Directive 2003/ 6, situations that are typical examples of intermediate steps in protracted processes, namely, negotiations in course and decisions taken or contracts made by the management body of an issuer that need the approval of another body of the issuer to become effective.16 Moreover, according to the Court, this interpretation does not hold true only for those steps, which have already come into existence or have already occurred, but also concerns, under Article 1(1) of Directive 2003/124, steps that may reasonably be expected to come into existence or occur.17 At the same time, the Court placed special emphasis on the aim of the insider dealing prohibition. Because the aim of MAD was to protect the integrity of European financial markets and enhance investor confidence, the Court held that a narrow interpretation of the inside information would undermine the aim of MAD.18 Moreover, according to the ECJ, the notion of ‘a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so’ refers to future circumstances or events from which it appears, on the basis of an overall assessment

11

Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 12 et seq. Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 21 et 22. 13 OLG Stuttgart, (2007) NZG 352. 14 OLG Frankfurt, (2009) NJW 1520. 15 Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 31. See also CESR/06562b, para. 1.6. and CESR 02/089d, para 20. 16 Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 32. 17 Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 38. 18 Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 35. 12

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of the factors existing at the relevant time, that there is a realistic prospect that they will come into existence or occur.19 However, that notion should not be interpreted as meaning that the magnitude of the effect of that set of circumstances or that event on the prices of the financial instruments concerned must be taken into consideration.20

Consequently, if we want to examine, e.g., whether a non-binding offer or the result of a due diligence in a merger project constitutes precise information, we must review whether the abovementioned conditions are met for both the merger project and the intermediate step.21 This reasoning was, in general terms, followed by the ECJ in a later case (Lafonta), referring also to the notion of precise information.22 The question in this case was whether the acquisition of total return swaps agreements by a French company, which later enabled the acquisition of the underlying shares, should be considered as inside information. The Court noted in the Lafonta case that the only information excluded from the concept of ‘inside information’ . . . is information that is vague or general, from which it is impossible to draw a conclusion as regards its possible effect on the prices of the financial instruments concerned.23

Moreover, according to the Court, it is not necessary to infer from a piece of information with a sufficient degree of probability that the potential impact of the information will be on a particular direction.24 This view is supported, according to the ECJ, by both the wording of the relevant provision and the purpose of MAD. Accordingly, the Court emphasised that a narrow interpretation of the scope of inside information that covers only information makes it possible to anticipate the direction of the price of the financial instrument concerned, which could undermine the objective of the directive, i.e., to protect the integrity of the market and enhance the confidence of the investors.25

3 The Disclosure Obligations After MAR The issue of how to define the inside information in a protracted process was one of the most controversial issues in the MAR negotiations.26 Although the original proposal of the Commission was to partially disconnect the disclosure obligation

19

Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 56. Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 56. 21 See also Kalss and Hasenauer (2014), p. 270. 22 Case C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162. See on this case Avia (2015), p. 23; Klöhn (2015a), p. 162; Klöhn (2015b), p. 809. 23 C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 31. 24 C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 38. 25 C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 35. 26 Hansen (2016), p. 19. 20

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from the notion of inside information,27 the considerations of the Court in the Geltl case have influenced the European legislator, which incorporated the wording of the Geltl case in MAR.28 More specifically, according to Art. 7 (2) of MAR, For the purposes of paragraph 1, information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur, where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the financial instruments or the related derivative financial instrument, the related spot commodity contracts, or the auctioned products based on the emission allowances. In this respect in the case of a protracted process that is intended to bring about, or that results in, particular circumstances or a particular event, those future circumstances or that future event, and also the intermediate steps of that process which are connected with bringing about or resulting in those future circumstances or that future event, may be deemed to be precise information.

Moreover, according to para 3 of the same Art., an intermediate step in a protracted process shall be deemed to be inside information if, by itself, it satisfies the criteria of inside information

An analysis of what constitutes inside information in a protracted process can also be found in the Preamble of MAR.29 According to the latter, where inside information concerns a process which occurs in stages, each stage of the process as well as the overall process could constitute inside information. An intermediate step in a protracted process may in itself constitute a set of circumstances or an event which exists or where there is a realistic prospect that they will come into existence or occur, on the basis of an overall assessment of the factors existing at the relevant time.

It is obvious that the above analysis is in line with the previous case law of ECJ in relation to the MAD.30 At first glance, the new legal framework seems to provide legal certainty in European capital markets law. Moreover, this goal is explicitly mentioned in the Preamble of MAR.31 However, the disclosure obligations remain not crystal clear.32 The major difficulties of interpretation refer to the meaning of a ‘realistic prospect’ or ‘reasonably be expected’. At the same time, it remains unclear when information is likely to have a significant effect on the prices of a financial

27 Commission proposal, COM (2011) 651, Brussels, 20 October 2011. See also Krause and Brellochs (2013b), p. 318. 28 Hansen (2016), p. 9. 29 Recital 16 of MAR. 30 See above under Sect. 2. 31 Recital 18 of MAR: ‘Legal certainty for market participants should be enhanced through a closer definition of two of the elements essential to the definition of inside information, namely the precise nature of that information and the significance of its potential effect on the prices of the financial instruments. . .’. 32 Langenbucher (2013), p. 1406: ‘Der neu gefasste Begriff der Insiderinformation gewährleistet auch nach Inkrafttreten der Verordnung keine trennscharfe Fassung des Tatbestands’; Schopper and Walch (2014), p. 259: ‘Die aktuelle Rechtslage führt zu einer großen Rechtunsicherheit für die Emittenten und auch für die mit der Vollziehung betrauten Behörden’.

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instrument in the eyes of a rational investor.33 Moreover, it is unclear whether the significant effect is linked to a precise requirement. At this point, the Lafonta case seems not to be in line with the ruling in Geltl. In Geltl, the elements of the inside information are considered autonomous and examined separately,34 but in Lafonta, these criteria are somehow interconnected. Therefore, in the latter case, the ECJ explicitly mentioned the ‘significance effect’ while examining the requirement of precise information.35 Nonetheless, it is not always clear whether an early stage of an M&A case constitutes inside information and must be publicly disclosed. The ESMA has not yet published any guidelines on this topic. Of course, there is the guidance of the CESR, referring to the previous legal regime. According to the latter, it is not necessary for a piece of information to be comprehensive for it to be considered precise.36 Nor it is necessary that there are no other alternates.37 Moreover, for the element of price significance, the guidance of CESR refers to the following three criteria: (a) historical price significance of the information, (b) analyst reports, and (c) self-assessment in the past of the issuer.38 Although these criteria vary widely from company to company and from case to case, the Guidance of the CESR does not answer the abovementioned questions, nor can it offer us a robust tool to define inside information in a protracted process. Let us examine the following example39: (a) An issuer decides internally to enter into preliminary discussions for an M&Α with another company. (b) He signs a

33

See analytically Veil (2017), pp. 204 et seq. Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 52, 53: ‘52. Secondly, an interpretation to the effect that, the greater the magnitude of the possible effect of a future event on the prices of the financial instruments concerned may be, the lower the degree of probability required in order for the information in question to be held to be precise, would imply that the two elements required for information to be inside information, set out in Article 1(1) and (2) of Directive 2003/124 respectively, namely that the information must be precise and must be likely to have a significant effect on the prices of the financial instruments concerned, are co-dependent. 53. The specific criteria set out in those two paragraphs are minimum conditions which must each be satisfied in order for information to be held to be ‘inside’ information within the meaning of point 1 of Article 1 of Directive 2003/6’. 35 Case C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 31: ‘it is enough that the information be sufficiently exact or specific to constitute a basis on which to assess whether the set of circumstances or the event in question is likely to have a significant effect on the price of the financial instruments to which it relates’. 36 CESR/06-562b, para.1.7: ‘an approach to an target company about a takeover bid can be considered as precise information even though the bidders had not yet decided the price’. 37 CESR/06-562b, para. 1.7. 38 CESR/06-562b, para. 1.14. 39 See also the facts in VwGH 2012/17/0554: ‘In dem Protokoll über die Sitzung sind schlagwortartig “nächste Schritte” (wie “Projektstruktur”, “Argumentarium Sektor”, verschiedene Gespräche mit bestimmten Personen (im Verwaltungsstrafverfahren war insbesondere darauf hingewiesen worden, dass als Ergebnis der Klausur Gespräche mit den Eigentümern der RZ AG aufgenommen werden sollten), Effekt auf Rating, etc.). . . .’. See also CA Paris 2012/20580, 2 Octobre 2014. 34

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non-disclosure agreement with the other company (target company). (c) He engages advisers for the transaction (legal and tax advisers). (d) He issues a non-binding letter (approved by the investment committee). (e) He enters into discussions based on the non-binding letter. (f) The Board of Directors (BoD) resolves the M&Α. (g) The General Assembly/supervisory board approves the M&Α. Considering the different stages of the merger process, the question is when must an issuer disclose inside information? The answer to this question is not at all obvious. Moreover, the hurdles of interpreting and applying the relevant provisions are evidenced by the contradictory judgements delivered by national courts.40 Reading into these judgements, the article attempts to analyse the notion of precise information and simultaneously delineate the disclosure obligations in (cross-border) mergers in European capital market law. Before addressing these issues, we must note that according to EU law, M&Αs are considered multistage events and that each intermediate step of an M&A could be considered inside information if it meets the criteria laid down in MAR. Moreover, Art. 17(4) of MAR permits the issuer to delay the public disclosure of inside information if the disclosure is likely to prejudice its legitimate interests. Examples of these legitimate interests are laid down in recital 50 of the Preamble to MAR, which mirror Art. 3 (1) of Directive 2013/124: (a) on-going negotiations, or related elements, where the outcome or normal pattern of those negotiations would be likely to be affected by public disclosure, and (b) decisions or contracts made by the management body of an issuer that need the approval of another body of the issuer to become effective, where the organisation of such an issuer requires the separation of those bodies. The ESMA considers that M&Αs are generally to be considered to fall in the case of negotiations whose outcome would be likely to be affected by immediate public disclosure.41 This is explicitly laid down in both the Consultation Paper entitled Draft Guidelines on the Market Abuse Regulation42 and the MAR Guidelines referring to the delay in the disclosure of inside information.43 Consequently, there is no doubt that M&Αs are considered multistage events, and according to Art 7 (3) of MAR, each stage of an M&A can be considered inside information if the criteria of inside information are met. This approach gives the impression that there is no general rule referring to the stage of an M&Α that, by definition, should be considered inside information. The answer should always be given on an ad hoc basis, considering an integrated approach of the existing factors at a specific time. In the Preamble to MAR, it is explicitly stated that the consideration should be made on the basis of an overall

40

See below under Sect. 4. M&A can fall in both cases, i.e. ongoing negotiations and decisions taken, which need approval of another body. 42 ESMA/2016/162, no. 73. 43 ESMA/2016/1478. 41

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assessment of the factors existing at the relevant time.44 This view is also supported by national and European case law. As stated in the Hamman case, whether there is inside information in a specific case is heavily fact dependent.45 Moreover, in Geltl, it is stated: In order to determine whether it is reasonable to think that a set of circumstances will come into existence or that an event will occur, an assessment must be made on a case-by-case basis of the factors existing at the relevant time.46

The ad hoc approach makes the definition of the inside information at dogmatic level easier. However, such an approach does not always provide legal certainty. The issuer must examine in each stage of a process whether the criteria of inside information are met, thus being placed between the hammer and the anvil. If the issuer discloses in an early stage a piece of information: (a) he undertakes the risk to jeopardize the transaction, and (b) if the information turns out to be inaccurate, he risks to be sanctioned for market abuse for the dissemination of inaccurate information, and vice versa, if the disclosure of the information is made too late (and the criteria referring to the delay of disclosure are not met), the issuer takes the risk of being fined for non-disclosure of inside information. We return to this below under Sect. 5.2. At this point, we must note that there is a need to strike a balance between protecting the market and the investors on the one side and protecting the issuer on the other side. An effort in this direction is to be traced in the decisions of national courts and the guidance of the national authorities mentioned below under Sect. 4.

4 National Case Law and Guidelines of National Authorities Before turning to the national case law, a preliminary remark is necessary. Although the relation between national and European courts is of a collaborative nature, the correct interpretation of European Law is a matter for the ECJ.47 The rationale on this is that the exclusive jurisdiction of the ECJ in interpreting European law will safeguard the consistent interpretation and application of European Law. Moreover, it is a common phenomenon that the decisions of national courts, even when

44

Recital 50 of MAR. Hannam v FCA [2014] UKUT 0233 (TCC), para 65. See also on German case law BGH, (2013) NZG 708, 712: ‘Bei der Beurteilung nach den Regeln der allgemeinen Erfahrung sind alle tatsächlichen Umstände einzubeziehen’. 46 Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 45. See also Opinion of GA Wathelet in Case C-628/13, para 50: ‘It is therefore necessary to examine, on a case-by-case basis, whether an item of information concerning even the possibility of a significant change could be information that a reasonable investor would be likely to use as part of the basis for his investment decisions, even if that information does not indicate the direction of the change’. 47 See Αrt. 267 TFEU. 45

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interpreting the same European provisions, vary considerably. Different approaches between national courts are usual, particularly when there is no relevant case law of the ECJ and the national courts consider that there is no need to refer a preliminary ruling to the ECJ on the ground that such an issue is not indispensable for adjudicating.48 A characteristic example of a different interpretative approach of market abuse provisions between national courts and the ECJ is the Hamman Case of the UK Upper Tribunal.49 In this case, the UK Court dealt with the question whether the effect to the prices as requirement refers to a movement in price in a particular direction (upwards or downwards) or a mere movement.50 The English Court decided that the effect to the prices refers to a movement in price in a particular direction.51 The same was also decided by the Austrian Supreme Administrative Court (VwGH),52 but some time later, the ECJ in the Lafonta case decided that the opposite is true.53 Hence, it is obvious that the national case law implementing European provisions must be read very carefully and interpreted in light of European Law. Nonetheless, analysing the national case law and the guidance of national authorities could be very useful. National courts (at least some of them) are well experienced on insider dealing interpreting and applying market abuse rules more often than the ECJ. From this perspective, the analysis of national case law can enlighten the interpretation difficulties of the relevant provisions on the basis of specific facts and real examples. Furthermore, national case law offers a very useful interpretative tool both for scholars and for national and European courts when dealing with the same issues. In addition, in absence of ECJ case law, the synthesis of the national decisions can reveal a common interpretative denominator regarding the relevant European provisions and guarantee indirectly their uniform application within the Member States. In any case, the judicial dialogue, in which national courts increasingly and mutually refer to each other’s interpretations, suggests that national courts can contribute to uniformity and consensus.54 Moreover, the importance of the analysis of national case law for the interpretation of European provisions is well established in many fields of European Law,55

48

See on acte clair doctrine Case C-495/03, Intermodal Transports, EU:C:2005:552, para 37; Case C-340/99, TNT Traco, ECLI:ΕU:C:2001:281, para 35; Case C 283/81, Cilfit and Others, EU: C:1982:335, para 16. 49 Hannam v FCA [2014] UKUT 0233 (TCC). 50 The question was first arisen but not decided in Massey v FSA [2011] UKUT 49 (TCC). 51 Hannam v FCA [2014] UKUT 0233 (TCC), para 86. 52 VwGH 2012/17/0118. 53 Case C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 38, 39. See on this case above under Sect. 2. 54 Conant (2013), p. 394. 55 See especially the decentralised enforcement system of competition rules and the function of ECN.

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including, of course, European capital market law.56 A recent decision of the High Court of South Africa regarding the notion of inside information citing national (English) and European case law underlines the importance of the comparative approach.57 This approach will be followed also in our analysis. We focus on the case law in Austria, France, Germany, Greece and UK. Reference is mainly made (where possible) to recent national case law issued after the Geltl case of the ECJ.58

4.1

Austrian Supreme Administrative Court (VwGH)

The Austrian Supreme Administrative Court recently dealt with the notion of inside information in several cases.59 In the first case, the Austrian Court had to decide whether the interest of a Russian firm to acquire a material holding of a company owned by an Austrian company should be considered inside information.60 The Austrian Capital Market Authority held that the interest of the Russian firm was realistic enough and therefore had to be qualified as inside information. The Austrian Capital Market Authority placed emphasis on a letter of an investment bank, in which the bank advised the listed company to take all necessary legal steps (legal due diligence) in order to be prepared for the transaction. However, the Austrian Supreme Court held that the offer in conjunction with the mail of the investment bank could not be considered inside information due to the lack of information referring to the price.61 A reasonable investor could only speculate about the impact of this transaction on the price. In other words, when the letter of the investment bank was sent, both the realistic prospect that the transaction would come into existence and the information referring to the price were missing.62 Hence, the information could not be considered inside information. In the second case, the Austrian Supreme Court had to decide whether a decision of the BoD of a listed company to start a merger project with another company

56

See specifically on the notion of inside information Krause and Brellochs (2013a), p. 283. Zietsman and Another v Directorate of Market Abuse and Another (A679/14) [2015] ZAGPPHC 651; 2016 (1) SA 218 (GP) (24 August 2015). 58 See also Krause and Brellochs (2013b), p. 309 referring to case law before Geltl. 59 See generally Kalss and Hasenauer (2014), p. 269; Schopper and Walch (2014), p. 255. 60 See VwGH 2012/17/0118, (2014) 62 Bankarchiv 625. 61 VwGH 2012/17/0118, (2014) 62 Bankarchiv 625: ‘Die Information mangels einer Bezifferung des Kaufpreises nicht so ausreichend bestimmt ist, dass sie einen Schluss auf die mögliche Auswirkung auf den Kurs des Finanzisnstruments zuließe’. 62 VwGH 2012/17/0118, (2014) 62 Bankarchiv 625: ‘Sowohl an der Eintrittswahrscheinlichkeit für das Zustandekommen eines Verkaufes der M Aktien fehlte als auch keine ausreichenden Anhaltspunkte dafür vorlagen, welcher Verkaufspreis bekannt zu geben gewesen wäre, womit es an der Bestimmtheit für die mögliche Auswirkung des Ereignisses auf den Kurs des Finanzinstruments mangelte’. 57

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constituted inside information.63 The Austrian Capital Market Authority endorsed the view that the abovementioned decision of the BoD was inside information because the event (i.e., the merger) coming into existence was not unrealistic. However, the Austrian Supreme Court rejected this view. The latter, taking into account the considerations of the ECJ in the Geltl case, focussed on the realistic prospect of the event coming into existence.64 The Austrian Court placed emphasis on the fact that the decision was subject to internal examinations and due diligence as well as discussions referring to the impact that the common direction of both companies would have to the issued bonds. Due to these uncertainties, the Court concluded that the project’s coming into existence at this specific time point was not a realistic prospect.65 Nonetheless, in two recent cases, the Austrian Supreme Court partially reversed its previous case law ruling that the conclusion of a Memorandum of Understanding (MoU) having as the objective the disposal of an important activity of a listed company and signalising a new corporate policy of the same company constitute as such inside information.66 The argument was that the MoU contained terms referring to the price and the conclusion of the transaction, making clear that there was a realistic prospect that the project will come into existence. Moreover, the Court held that the legal character of the MoU (binding/non-binding) was not important.67 Further, no movement in price in a particular direction (upwards or downwards) was necessary to establish inside information.68 Hence, the conclusion of the MoU was considered to encompass both precise information69 and the likelihood of having a significant effect on the prices of the related financial instruments.70

63

VwGH 2012/17/0554, (2014) 62 Bankarchiv 627. VwGH 2012/17/0554, (2014) 62 Bankarchiv 627: ‘auf eine hinreichende Wahrscheinlichkeit (mit dem vom EuGH dazu getroffenen Klarstellungen) der Durchführung der Transaktion ankommt’. 65 VwGH 2012/17/0554, (2014) 62 Bankarchiv 627: ‘. . . Wie die belangte Behörde selbst festgestellt hat, folgten auf den Beschluss noch eine Reihe von internen Prüfungen und Due Diligence Prüfungen sowie Erörterungen, wie sich eine Zusammenführung der Institute auf die von der RZ AG nach englischem Recht emittierten Anleihen auswirken würden . . . Es kann daher nicht davon ausgegangen werden, dass durch den Beschluss vom 4.11.2009 bereits die Annahme (vernünftigerweise im Sinn des Urteils des EuGH in der Rechtsache Geltl) gerechtfertigt war, dass und in welcher Weise das Projekt auch tatsächlich durchgeführt werde’. 66 VwGH 2015/02/0152; VwGH 2016/02/0020 bis 0023-5. 67 VwGH 2015/02/0152: ‘. . .nicht darauf ankommt, ob das MoU rechtsverbindlich oder bloß “unverbindlich” sei’. 68 VwGH 2015/02/0152: ‘. . . Auffassung . . . in Ansehung des oben bereits (auszugsweise) wiedergegebenen Urteils des EuGH vom 11. März 2015, C-628/13, Lafonta, nicht aufrecht erhalten werden kann’. 69 VwGH 2015/02/0152. 70 VwGH 2016/02/0020. 64

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French Court of Appeal (CA Paris)

The French Appeal Court had the opportunity to define the notion of inside information in a series of cases referring mostly to prohibited insider dealing. The inside information was in most cases connected with a tender offer71 or an important transaction of a listed company.72 Considering the landmark ruling of the ECJ in the Geltl case, the French courts held that a project should be considered inside information if the latter is sufficiently precise to have a realistic prospect to come into existence.73 In other words, the realisation of the project does not have to be certain to be considered inside information.74 Thus, it was decided that the recommencing of the negotiations between the parties based on a new better offer on the price has a realistic prospect of coming into existence.75 A formal decision of the BoD of the target company is not required. Neither must the final details be already decided nor the final price be fixed for precise information to be established.76 Moreover, the inherent conditions linked to the nature of the project as such do not exclude the notion of the precise information.77 In a characteristic case, the CA Paris held that the precise character of the information derives from the entirety of the elements of the case.78 Hence, the fact that a company has already commissioned a bank to examine the offer project, contacts have been established between the representatives of the companies, a confidentiality agreement has been signed, a law firm has been chosen and a non-binding offer approved by the investment committee has been made, while the president of the company emphasised that this offer reflects the real interest of the company for the realisation of the project, all this reflects the precise character of the information.79

71

See e.g. CA Paris 2012/20580 (2 October 2014); CA Paris 2013/14873 (20 November 2014). See e.g. CA Paris 2013/18202 (22 January 2015). 73 CA Paris 2013/14873 (20 November 2014): ‘. . .une information sur un projet d’offre publique est réputée précise si le projet est suffisamment défini entre les parties pour avoir des chances raisonnables d’ aboutir . . .’. See also CA Paris 2013/18202 (22 January 2015). 74 CA Paris 2013/16393 (27 November 2014): ‘. . .Il n est pas nécessaire, pour qu’une information soit précise au sens de l’article 621-1 que la réalisation de l’ événement en cause soit certaine’. 75 CA Paris 2013/18202 (22 January 2015): ‘. . .la reprise des négociations sur la base d’ une nouvelle offre réévaluée et donc susceptible d être acceptée . . .’. 76 CA Paris 2013/14873 (20 November 2014): ‘. . . le critère de précision ne requiert pas . . . que le Conseil d’ administration ait formellement approuve l’ opération, ni que ses modalités définitives soient arrêtées, ni même que le prix ait été fixé..’. See also CA Paris 2013/18202 (22 January 2015). 77 CA Paris 2013/14873 (20 November 2014): ‘. . . peu important en revanche l’ existence d’ aléas inhérents a toute opération de cette nature, quant a la réalisation effective de ce projet’. See also CA Paris 2013/18202 (22 January 2015); CA Paris 2013/16393 (27 November 2014). 78 CA Paris 2012/20580 (2 October 2014). See also Cas.com (3 Mars 2017). 79 CA Paris 2012/20580 (2 October 2014). See also Cas.com (3 Mars 2017). 72

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115

German Supreme Court (BGH) and Issuer Guideline of Capital Market Authority (Bafin)

The German case law before Geltl has already been analysed above.80 In this section, we will refer to the case law after Geltl, i.e., to the decision of the German Supreme Court (BGH) issued after the preliminary ruling of the ECJ.81 The decision of the BGH is basically aligned with the decision of the ECJ, so we do not have to repeat its rationale. However, the decision of the German Supreme Court helps us better understand the term of ‘realistic prospect’. Hence, according to the BGH, the term ‘realistic prospect’ is to be understood as ‘more likely than not, while a high probability is not required’.82 Moreover, to establish inside information, the German Court places special emphasis on the assessment of the facts of each case.83 The German Capital Market Authority (BaFin) follows a similar fact-basedapproach. This approach derives explicitly from the wording used in the Issuer Guideline (Emittentenleitfaden) dated 28.4.2009.84 In this Guideline, the German Authority tries to describe the facts that trigger a disclosure obligation in an M&A. This fact-based analysis is quite helpful for delineating the precise character of a piece of information. More specifically, according to the Issuer Guideline of Bafin,85 The internal decision by a bidder to enter into preliminary discussions with a potential target company does not generally constitute inside information. The same applies vice versa. At that stage, such decision generally is not sufficiently specific to qualify as inside information. Similarly, no inside information has arisen, as a rule, by the time advisers (such as lawyers, banks, management consultants) are engaged because this is merely a preparatory act. Likewise, the issuance of a non-binding indicative offer letter would in many cases also have to be regarded as such a preparatory act. Experience shows that, at this early stage, the success of a transaction will depend on many different, as yet uncertain, factors. The same applies to the bidder’s preliminary discussions with the target company or its shareholders, even if the parties have already entered into a non-disclosure agreement. In principle, inside information arises only if and when, from a reasonable investor’s perspective, it can be reasonably expected that the transaction will be concluded and this, together with the prospect of any expected consideration (e.g. a premium), has the potential 80

See above under Sect. 2. BGH (2013) NZG 708. 82 BGH (2013) NZG 708, 712: ‘Zwar muss danach eher mit dem Eintreten des künftigen Ereignisses als mit seinem Ausbleiben zu rechnen sein, aber die Wahrscheinlichkeit muss nicht zusätzlich hoch sein’. 83 BGH (2013) NZG 708, 712: ‘Damit wird nicht ausschließlich auf eine Wahrscheinlichkeitsbeurteilung abgestellt, sondern auf Regeln der allgemeinen Erfahrung . . . Bei der Beurteilung nach den Regeln der allgemeinen Erfahrung sind alle tatsächlichen Umstände einzubeziehen’. 84 BaFin Emittentenleitfaden, Nr. IV.2.2.14 (Stand 28 April 2009). 85 BaFin Emittentenleitfaden, Nr. IV.2.2.14 (Stand 28 April 2009). 81

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of constituting inside information. For this purpose, news, rumors or takeover speculation already priced in must also be taken into account.

Nonetheless, as already noted, the Guideline was issued in 2009; consequently, it does not consider either MAR or its implementing regulations and the recent ECJ case law. Therefore, the German Authority is preparing a new version of the Guideline according to the new legal framework.86 Moreover, in a recent FAQ issued by the German Authority, it is stated that BaFin fully endorses the ECJ case law and the ESMA guidelines.87

4.4

Greek Supreme Administrative Court (ΣτΕ)

In the case 317/2014, the Greek Supreme Court had to decide whether a non-binding offer submitted by the National Bank of Greece (NBG) for the acquisition of a Turkish bank (Finansbank) was as sufficiently precise to be considered inside information.88 The Court focused on the following considerations: (a) the non-binding character of the offer; (b) the lack of information referring to the price, the financing of the acquisition (i.e., the cost of the acquisition) and the basic terms and conditions of the acquisition (licences and approvals of the competent authorities), the guarantees and securities to be offered; and (c) the fact that NBG at this specific time had not performed due diligence on the Turkish bank. According to the Court, the non-binding character of the offer and the lack of the aforementioned information ‘did not allow for the extraction of any conclusion for the possible effect of the offer to the share price’. Based on this consideration, the Court held that the information could not be considered inside information. The mere fact that the name of the Turkish bank was known could not be considered relevant. Moreover, the argument of the Court of Appeal that the possible positive result of the offer of NBG would probably affect positively the turnover of the latter and its share in the developing market of Turkey was rejected on the grounds that the information was not sufficiently precise to affect the prices and on the grounds that the argument was hypothetical and based on unattainable assumptions. Surprisingly, the Greek Supreme Court also held that a binding offer of the National Bank of Greece should not be considered inside information.89

86

https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2016/fa_bj_1607_adhoc_publizitaet.html. 87 Art. 17 MAR—Veröffentlichung von Insiderinformationen (FAQs), Stand: 20.6.2017. 88 See analytically Staikouras (2015), p. 210; Botopoulos (2016), p. 609. 89 Staikouras (2015), p. 210.

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UK Financial Services and Markets Tribunal

The English courts have addressed the notion of insider information in several cases. The landmark cases in insider dealing are (a) A Mohammed v Financial Services Authority,90 (b) D Massey v. Financial Services Authority91 and (c) Hannam v Financial Conduct Authority.92 In the first case, an audit manager purchased shares in an issuer at a time when he knew, as a result of confidential information obtained in the course of his employment with the audit firm, that the issuer intended to sell its electrical division, that the sale process was progressing well, and that any sale was likely to be announced shortly.93 This behaviour was considered by the FSA to be market abuse, but the audit manager challenged the decision of the FSA on a number of grounds. More specifically, the applicant argued that it was the details relating to the disposal that were relevant, cash to be received, terms and conditions, and profit to be received by the vendor that would have determined whether the transaction would be favourable to the issuer.94 However, the tribunal considered that the information was in itself specific and precise. The Court based its argument on the fact that the information that the issuer was proposing to sell a division would be relevant to making an investment decision, even without clear information about the timing and financial terms.95 This conclusion was, according to the tribunal, inescapable, when one considers the size of the disposal of the electrical division in the context of the issuers group as a whole.96 In the Massey case, the Upper Tribunal had to define the precise character of the inside information from another angle. The issue to decide was when a piece of information is sufficiently specific to enable a conclusion to be drawn on the possible effect on the prices. According to the Tribunal: The phrase “specific enough to enable a conclusion to be drawn” seems to introduce a strong note of definiteness, which is then effectively removed, or at least diluted, by the phrase “as to the possible effect. . . on the price”. We note that there is no requirement for a conclusion as to the actual or probable effect on the price, but only as to the possible effect. We also note that the statutory words contain no explicit guidance on how precise the conclusion needs to be. Is it enough that there may be a conclusion merely that the event, when it becomes known, may alter the price? A risk of alteration is a “possible effect”, even if it is not known whether the occurrence of an alteration is more probable than not, or whether, if it occurs it is more likely to be an increase or a decrease.97

90

A Mohammed v FSA [2005] Financial Services and Markets Tribunal, 12. D Massey v FSA [2011] UKUT 49 (TCC). 92 I Hannam v FCA [2014] UKUT 0233 (TCC). 93 A Mohammed v FSA [2005] Financial Services and Markets Tribunal, 12, para 1. 94 A Mohammed v FSA [2005] Financial Services and Markets Tribunal, 12, para 76. 95 A Mohammed v FSA [2005] Financial Services and Markets Tribunal, 12, para 77. 96 A Mohammed v FSA [2005] Financial Services and Markets Tribunal, 12, para 77. 97 D Massey v FSA [2011] UKUT 49 (TCC), para 38. 91

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Furthermore, in Hannam, the Upper Tribunal held that a statement made by an insider to a third party that is not wholly accurate may nonetheless convey a message to the recipient of the statement, which does give the recipient an advantage over other market participants.98 From this point of view, the statement should, in principle, be capable of amounting to inside information, notwithstanding its inaccuracy.99 Moreover, the realistic prospect does not mean that there must be a morethan-even chance of the circumstances coming into existence or the event occurring.100 It certainly means that the prospect must not be fanciful.101

5 Remarks on National Case Law Having briefly analysed the national case law above, we can now turn to the notion of inside information according to MAR. Again, the question is whether the national case law can help us analyse the notion of inside information. The answer seems to be negative because the national case law varies so significantly that a one-dimensional approach of the notion of inside information, even after Geltl, seems to be impossible. Even in the same legal order, there is often a different approach of the notion of inside information. Moreover, the number of the decisions mentioned above is not indicative, considering the number of Member States. However, a careful analysis of the abovementioned case law reveals some interesting elements and allows some useful conclusions. These are the following: (a) the notion of inside information is used by the national courts uniformly both for the insider dealing prohibition as well as the disclosure obligation102; (b) to delineate the concept of inside information, the national courts emphasise the objective of insider dealing provisions and information overload103; (c) the realistic prospect and the likely requirement are not connected to arithmetical calculations104; and (d) almost all national case laws lack empirical evidence to determine whether information is liable to have a significant effect on prices.105 We analytically discuss these elements below.

98

I Hannam v FCA [2014] UKUT 0233 (TCC), para 51. I Hannam v FCA [2014] UKUT 0233 (TCC), para 51. 100 I Hannam v FCA [2014] UKUT 0233 (TCC), para 76. 101 I Hannam v FCA [2014] UKUT 0233 (TCC), para 76. 102 See below under Sect. 5.1. 103 See below under Sect. 5.2. 104 See below under Sect. 5.3. 105 See below under Sect. 5.4. 99

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The Onefold Notion of Inside Information

As mentioned above, the concept of inside information is relevant for both the prohibition of insider dealing and the disclosure obligations of an issuer.106 Considering the particularities of multistage events and the interest of the issuer, prominent scholars and some national authorities proposed a twofold interpretation of the notion of inside information.107 Inside information for the purposes of market abuse should be interpreted broadly, but the inside information for disclosure purposes should be interpreted narrowly. However, neither the European legislature nor the ECJ accept a twofold approach of the inside information. The onefold approach is also followed by the national case law mentioned above.108 All relevant decisions either accept the onefold notion of inside information or do not explicitly question it. The analysis in Hannam is very characteristic. According to the latter, we consider that our approach is one which recognises that the concept of inside information is relevant not only to market abuse as a result of disclosure but also to the obligation of an issuer to inform the general public of inside information as soon as reasonably possible under 6(1) of the MAD and section 96 FSMA.109

The fact remains, however, that the national decisions do not reach the same conclusions regarding the notion of inside information. There are discrepancies that are not obligatorily linked to the notion of the ‘realistic prospect’ and the ‘reasonable investor’. These interpretational discrepancies between the national courts could partially be explained if we consider the underlying facts of each case. Should we focus on these facts, we will realise that the national courts and authorities seem to be more willing to interpret narrowly the notion of the inside information in relation to the disclosure obligation of an issuer but are reluctant to make such an interpretation when it is about a case of prohibited insider dealing. Hence, case law that endorses a narrow notion of inside information is usually110 (but not always111) linked to the omission of an ad hoc disclosure of an issuer, whereas decisions endorsing a broad view are usually (but not always) linked to prohibited insider dealing. This could also be a plausible explanation regarding the differentiations between the national decisions and perhaps reveals a new angle to read into the relevant decisions. In any case, the interpretation of inside information is linked to the objective of inside information and the negative consequences of a broad interpretation of the inside information for issuers of financial instruments.

106

See above under Sect. 1. See Hansen (2016), pp. 6 et seq.; Noia and Gargantini (2012), p. 519. 108 See above under Sect. 4. See also on Austrian Law Kalss et al. (2015), p. 561; on German Law Frowein (2013), p. 233; on French Law Bonneau and Drummond (2010), p. 635; on Greek Law Tountopoulos (2015), p. 359. 109 I Hannam v FCA [2014] UKUT 0233 (TCC), para 68. 110 See the case law in Austria and Greece. 111 See e.g. C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162. 107

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The Objective of Inside Dealing Provisions and Information Overload

As noted in passing above, the decisions of the ECJ focus on the aim of the insider provisions, which is to protect the integrity of European financial markets and enhance investor confidence. The latter presupposes that investors are placed on an equal footing and protected against the improper use of insider information . . . whereas selective disclosure by issuers can lead to a loss of investors confidence in the integrity of financial markets.112

Reference to the objective of the inside dealings provisions has also been made in some of the above analysed national case law113 to establish a broad interpretation of the notion of inside information.114 However, not every form of information has positive effects on capital markets. The information to be disclosed must meet some minimum qualitative and quantitative criteria to have positive effects on the smooth functioning of the market. The ECJ has already ruled that vague or general information, from which it is impossible to draw a conclusion about its possible effect on the prices of the financial instruments concerned, could not be considered inside information115; therefore, it does not have to be disclosed to the investors. Moreover, as the French case law notes, the disclosure of a piece of information should not in any case mislead the investors.116 Moreover, the negative effects of information overload are well established in the legal and financial theory.117 Early publication can render an entrepreneurial project, particularly a takeover project, costlier.118 More specifically, in case of a takeover, it is well documented that the disclosure of the takeover intent immediately increases the target’s market price to at least the level of the bid. Thus, the takeover becomes more costly, if not impossible. This is exactly why the European legislator allows an issuer to delay the disclosure of inside information, among others, under the condition that the disclosure of this information is likely to prejudice its legitimate interests.119 At the same time, the early disclosure of inside information (particularly if it is connected with an entrepreneurial project) can jeopardize the decision-making 112

Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 33. See, to that effect also, Case C-45/08, Spector Photo Group and Van Raemdonck, ECLI:ΕU:C:2009:806, para 47, and Case C-445/09, IMC Securities, ECLI:ΕU:C:2011:459, para 27. 113 See e.g. I Hannam v FCA [2014] UKUT 0233 (TCC), para 51; BGH (2013) NZG 708, 712: ‘Das entspricht aber dem Zweck der Richtlinie, die Anleger einander gleichzustellen und u. a. vor der unrechtmäßigen Verwendung von Insiderinformationen zu schützen’. 114 VwGH 2015/02/0152. 115 C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 31. 116 CA Paris 2001/21885 (26 September 2003). 117 Paredes (2003), p. 447; Möllers and Kernchen (2011), p. 1; Shahar and Schneider (2011), p. 647. 118 Noia and Gargantini (2012), p. 486. 119 See Art. 17 para 4 of MAR. See on the delay of disclosure Klöhn (2013), p. 55.

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process according to the internal structure of a listed company.120 More specifically, the early disclosure of information creates expectations referring to the realisation of the project announced, which hinders the internal organs of the company from rejecting the project already disclosed or deciding otherwise. This phenomenon has negative consequences for the functioning of a stock corporation because it can lead to a circumvention of the power of decision of specific organs of the company. Moreover, the disclosure of information referring to future events in an early stage can be proved inaccurate and consequently mislead investors. In any case, investors will not be able to assess the information correctly.121 All these arguments could lead to a restrictive interpretation of the notion of inside information. The Austrian Court explicitly endorses this view. According to the latter, if adopting an obligation to publicly disclose information in a very early stage of internal considerations, a threat to the company may occur.122 The difficult situation of the issuer and its management is also well described in US case law. According to the latter, if the standard of materiality is unnecessarily law, not only may the corporation and its management be subjected to liability for insignificants omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause it to simply bury the shareholders in an avalanche of trivial information – a result that is hardly conductive to informed decision making.123

The negative consequences of the disclosure of a piece of information in an early stage are also recognised from the German Supreme Court.124 However, according to the latter, these consequences do not lead to a restrictive interpretation of the inside information. The issue is resolved by the legislator by recognising to the issuer access to delay of disclosure.125 This view seems also to be followed by the recent decision of the Austrian BVerwG.126

120

Koch (2017), pp. 372 et seq. See also Hitzer (2012), p. 862. 122 VwHG 2012/17/0554: ‘Der Beschwerdefall zeigt gerade in dieser Hinsicht, dass Kalss/ Zahradnik, BörseGNov 2004: Insiderrecht und Ad-hoc-Publizität, ecolex 2006, 393 (395), zuzustimmen ist, wenn sie bei einer Annahme einer Publizitätspflicht in einem sehr frühen Stadium interner Vorüberlegungen eine Gefahr für das Unternehmen erblicken’. See also Kalss and Hasenauer (2014), p. 269. 123 TCS Industries, Inc. v. Northway, Inc. 426 U.S. 438 (1976). 124 BGH (2013) NZG 708, 712: ‘Der Senat verkennt nicht, das dies frühzeitig zu einer veröffentlichungspflichtigen Insiderinformation führen kann, obwohl der unternehmensinterne Entscheidungsprozess noch nicht abgeschlossen ist’. 125 BGH (2013) NZG 708, 712. 126 BVerwG W148 2014668-1 (20.7.2016). 121

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The Realistic Prospect (Reasonable Be Expected) Requirement

As mentioned above, the ECJ has clarified that the term ‘may reasonably be expected’ refers to future circumstances or events from which it appears, on the basis of an overall assessment of the factors existing at the relevant time, that there is a realistic prospect that they will come into existence or occur.127 Consequently, on the one hand, it is obvious that events whose occurrence is implausible cannot be considered precise.128 On the other hand, a high (predominant) probability is not required.129 Hence, the realistic prospect is something more than a piece of vague and general information from which it is impossible to draw a conclusion about its possible effect on the prices of the financial instruments and something less than a high (predominant) probability. However, this conclusion does not offer us much help. The space between these limits (vague information and predominant probability) is enormous. Moreover, almost everything is possible. This approach would broaden extensively the disclosure obligations of an issuer. Therefore, some national courts interpret the term ‘realistic prospect’ as more likely than not.130 Whether an event is more likely or not to come into existence is a binary question that allows only one (yes or no) answer. Thus, according to some scholars, a realistic prospect requires that there must be more than a 50% chance that the outcome is reached (50% + X).131 However, from the abovementioned case law, it (explicitly or implicitly) derives that the national courts are reluctant to attempt to approach the question of the realistic prospect on the basis of assessing percentage chances. The German Supreme Court, although accepting that realistic prospect means more likely than not, underlines that a high probability is not required.132 Moreover, the English courts explicitly reject an arithmetic approach.133 The reason for this seems to be twofold. First, a statistical calculation presupposes that the set of outcomes is known, which is not the case for the interrelation between an entrepreneurial project and the prices of a financial instrument.134 Second, the assessment of percentages based on arithmetic calculations is subjective and does not offer a robust tool for interpreting the term ‘realistic prospect’. Consequently, the national courts

127

Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 46–49. C-628/13, Lafonta v Autorité des marchés financiers, ECLI:EU:C:2015:162, para 31. 129 Case C-19/11, Markus Geltl v Daimler AG, ECLI:EU:C:2012:397, para 46–49. 130 See e.g. BGH (2013) NZG 708, 712. 131 Mennicke and Jakovou (2016), § 13, no 71; Schopper and Walch (2014), p. 256; Hitzer (2012), p. 862. 132 BGH (2013) NZG 708, 712: ‘Zwar muss danach eher mit dem Eintreten des künftigen Ereignisses als mit seinem Ausbleiben zu rechnen sein, aber die Wahrscheinlichkeit muss nicht zusätzlich hoch sein’. 133 I Hannam v FCA [2014] UKUT 0233 (TCC), para 76. 134 Hansen (2017), p. 27. 128

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proceed to an overall assessment and simultaneously focus on the possibility of affecting the market price of the financial instrument.135

5.4

The Lack of Empirical Evidence

Another remark is that the national case law analysed above do not consider empirical evidence to establish the precise character of a piece of information and its possible impact on market prices. Nonetheless, in the financial literature, there is a plethora of financial studies referring to the effect of an M&A on market prices.136 These studies suggest that the M&A is generally linked to positive abnormal returns for the shareholders of the target company,137 but for the shareholders of the acquirer, the results are controversial. Moreover, it is suggested that the partial anticipation of a merger possesses informational value and could thus help investors reach a conclusion on the effect of the project on the market prices.138 However, there is a plethora of unknown parameters in this equation, and a general consensus in the financial literature has not been established. These controversial results and the discrepancies between financial studies could justify the reluctance of the national courts to focus on empirical evidence. Moreover, according to some national courts, the significance of a piece of information on the market prices is considered a legal issue that cannot be resolved by the provision of empirical evidence.139 In favour of this view is also the fact that the European legislature seems to have moved away from the financial theories and endorsed an autonomous criterion to define inside information. It focuses on the reasonable investor. Hence, the reasonable investor seems to be the key notion to define inside information.

5.5

The Reasonable Investor as Key Notion to Define Inside Information

A general definition of the notion of the reasonable investor can be found both in the Preamble to MAR and the Opinion of the GA Mengozzi in the Geltl Case. According BGH (2013) NZG 708, 712: ‘Damit wird nicht ausschließlich auf eine Wahrscheinlichkeitsbeurteilung abgestellt, sondern auf Regeln der allgemeinen Erfahrung. . .’. 136 Staikouras (2015), p. 212. 137 See e.g. Campa and Hernando (2004), p. 47. 138 Cornett et al. (2011), p. 595; Cai et al. (2011), p. 2242. 139 VwGH 2015/02/0152: ‘Bei dieser Frage handelt es sich im Übrigen um eine Rechtsfrage, deren Beantwortung einem Sachverständigenbeweis nicht zugänglich ist’. See also BVerwG W148 2014668-1 (20.7.2016): ‘Diese Prüfung der Kurserheblichkeit ist überdies, so der VwGH, eine Rechtsfrage, die einem Sachverständigenbeweis nicht zugänglich ist’. See also Langenbucher (2016), p. 420. 135

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to the former, ‘reasonable investors base their investment decisions on information already available to them, that is to say, on ex ante available information. . . . Such an assessment has to take into consideration the anticipated impact of the information in light of the totality of the related issuer’s activity, the reliability of the source of information and any other market variables likely to affect the financial instruments’.140 Moreover, according to the latter, the reasonable investor is defined as ‘an investor who tests information concerning the occurrence of future sets of circumstances or events against an objective criterion of reasonableness, rather than in relation to merely speculative purposes’.141 Nonetheless, if we try to apply the abovementioned definitions in specific cases, major interpretative problems arise. The most significant interpretational issues are the following: (a) It is not clear whether a reasonable investor considers the irrationalities of the market.142 The German Supreme Court in its landmark ruling in the IKB case referring to the subprime mortgage crisis in the USA held that a reasonable investor is one who also considers the irrational reactions of other market participants.143 (b) While the ECJ held that the magnitude of the effect of a set of circumstances or an event on the prices of the financial instruments concerned cannot be taken into consideration when examining the precise nature of a piece of information,144 it remains unclear whether the magnitude criterion must be considered when examining whether the information has a significant effect on prices of the financial instruments in question. The Austrian Supreme Court answered this question in the positive, holding that the magnitude of the effect or the event on the prices is important for a reasonable investor.145

140

Recital 14 of the Preamble to MAR. See Opinion of GA Mengozzi in Case C-19/11, para 71. 142 Veil (2017), p. 204. 143 BGH (2012) NJW 1800, 1805. See also Mennicke and Jakovou (2016), § 13, no 142a. 144 See above under Sect. 2. 145 VwGH 2016/02/0020: ‘Je höher die zu erwartenden Kursveränderungen seien, desto geringere Anforderungen würden auf Ebene der “Kursrelevanz” hinsichtlich der Eintrittswahrscheinlichkeit bestehen. Für diese Ansicht spreche auch der erste Erwägungsgrund der Richtlinie 2003/124/EG, wonach ein verständiger Anleger in seine Entscheidungsfindung auch die möglichen Auswirkungen einer Information auf den Kurs miteinbeziehe’; See also BVerwG W148 2014668-1 (20.7.2016) ‘ist nach herrschender Auffassung bei der Frage der Prüfung der Kursrelevanz eines Zwischenschrittes bei unwahrscheinlich eintretenden Endereignissen dennoch die Kurserheblichkeit zu bejahen, wenn im Falle des Eintritts (des Endereignisses) hohe Kursveränderungen erwartet werden können. Derartige Ereignisse sind daher ex ante betrachtet kursrelevant (vgl. zu dieser Auffassung mwN Schopper/Walch, Ad-hoc Publizität bei zeitlich gestreckten Sachverhalten – zugleich eine Besprechung von VwGH 2012/17/0554, ZFR 2014/164; Langenbucher, Der Begriff der Insiderinformation nach der Marktmissbrauch Verordnung, ÖBA 2014, 656; Sindelar, Zwischenschritte als Insiderinformation – Steht die jüngst dazu vom VwGH aufgestellt die Judikatur im Einklang mit den Vorgaben der Marktmissbrauch Verordnung?, ÖBA 2015, 483)’. 141

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(c) It is not clear whether the reasonable investor test is a substitute for the ‘significant effect on the price’ requirement or is a condition (restraint) on that ordinary meaning. The UK Upper tribunal opted for the former interpretation, ruling ‘We would have considerably sympathy with [Mr. Massey] view if the phrase ‘likely to have a significant effect on the price’ had be used in the Act in its ordinary sense . . . [but] whether or not the information was . . . likely to have a significant effect on the price, we consider it is clear that the information was ‘of a kind which a reasonable investor would be likely to use as part of the basis of his investments decisions’’.146 (d) As mentioned above, it is not clear whether the different elements of inside information, namely, (a) the precise character (and more specifically the element of a conclusion to be drawn as to the possible effect on the prices) and (b) the significant effect on prices, should be interpreted separately and autonomously or whether they should be combined. The national case law mentioned above seems to interpret these criteria autonomously. However, most of the national cases mentioned above were issued before Lafonta. Hence, they did not specifically address the analysis in the Lafonta case or the interrelation between the different elements of inside information. Consequently, the national courts, when deciding that the condition of the precise character of the information is not met, do not proceed to the next step, which is to examine whether this precise information is likely to have a significant effect on prices. Moreover, in cases where the condition of the precise character of the information is met, the national courts usually accept that the further condition of the significant price effect is also met. In other words, if a piece of information is considered precise, it is usually also considered price significant.147 The interrelation of the abovementioned elements is more or less obvious because they have a common denominator, i.e., the capacity to affect the prices. The latter is the common element both for the precise information and the significant effect of the price.

6 The Cross-Border Parameter The cross-border parameter in a merger adds a certain degree of complexity to the disclosure of inside information. This is particularly the case when (a) we have more issuers with financial instruments listed in different Member States or (b) the issuer

146

D Massey v FSA [2011] UKUT 49 (TCC), para 41. See also Opinion of GA Wathelet in Case C-628/13, para 29: ‘. . . information ‘of a precise nature’ is, in reality and in practice, often likely to have a significant effect on the prices of financial instruments and therefore constitutes inside information. Nevertheless, it should be made clear once again that the precise nature of information, on the one hand, and the likelihood of it having a significant effect on the prices of financial instruments, on the other, are two criteria which are both mandatory and legally distinct’.

147

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has one or more financial instruments listed in more (European) markets.148 The nature of the market (i.e., regulated market, MTF or OTF) is not relevant because the public disclosure of inside information also refers to financial instruments that have been already approved for trading on all these markets.149 The complexity of the matter is both at the substantial and procedural levels. At the substantial level, the issuer must address the interpretation of the notion of inside information and its disclosure in more than one legal order. Due to the legal nature of MAR, i.e., Regulation, the concept of inside information and the extent of disclosure obligation should, of course, be the same in all Member States.150 However, we already analysed above, under Sect. 4, that there are still different approaches in Member States for determining the right time for an issuer to proceed to disclosing. Consequently, the legal risk for the issuers in cross-border situations increases dramatically if they adopt a narrow interpretation of disclosure obligation. This usually leads to disclose inside information as soon as possible, i.e., even in the embryonic stage, to avoid negative repercussions. At the same time, disclosure obligations in cross-border situations are interrelated with the equal treatment of holders of shares.151 The basic obligation of the issuer is to treat all holders of shares, who are in the same position, equally.152 That means that all shareholders should have access to information simultaneously. In addition to substantial issues, there are procedural issues to address in crossborder situations. The major procedural issue is to define the competent authority in the case of a violation of the relevant provisions of MAR.153 According to Art. 22 of MAR, the decisive criterion for the competence of the different national authorities is geographical and is linked to the territory of each Member State.154 However, according to Art. 21 (1) of Directive 2004/109 (Transparency Directive),

148

See generally on the reasons of multiple listing Mittoo (1992), p. 40; You et al. (2013), p. 69. See Art. 17 (1) MAR. 150 See on the direct applicability of Regulations Art. 288 TFEU. See also Case 34/73, Variola Spa v Amministrazione delle finanze dello Stato, ECLI:ΕU:C:1973:101, para 10; Case C-606/10, ANAFE v Ministre de l'Intérieur, ECLI:ΕU:C:2012:348, para 72; Joined Cases C-4/10 and C-27/10, Bureau national interprofessionnel du Cognac v Gust. Ranin Oy, ECLI:ΕU:C:2011:484, para 66. 151 See generally on the principle of equality Case C-101/08, Audiolux SA v Groupe Bruxelles Lambert SA, ECLI:ΕU:C:2009:626, para 32, 64; Reul (1991) and Verse (2006). 152 See also Art. 17 (1) of Directive 2004/109. 153 See generally on the different systems Wymeersch (2005), p. 987. 154 According to Art. 22 of MAR: ‘. . . each Member State shall designate a single administrative competent authority for the purpose of this Regulation. Member States shall inform the Commission, ESMA and the other competent authorities of other Member States accordingly. The competent authority shall ensure that the provisions of this Regulation are applied on its territory, regarding all actions carried out on its territory, and actions carried out abroad relating to instruments admitted to trading on a regulated market, for which a request for admission to trading on such market has been made, auctioned on an auction platform or which are traded on an MTF or an OTF or for which a request for admission to trading has been made on an MTF operating within its territory’. 149

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the home Member State shall ensure that the issuer, or the person who has applied for admission to trading on a regulated market without the issuer’s consent, discloses regulated information in a manner ensuring fast access to such information on a non-discriminatory basis. . . .

Moreover, according to Art. 2 (1)(k) of Transparency Directive, ‘regulated information’ means all information which the issuer, or any other person who has applied for the admission of securities to trading on a regulated market without the issuer’s consent, is required to disclose under this Directive, under Article 6 of Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse).

Furthermore, according to Art. 37 MAR, references to Directive 2003/6/EC should be construed as references to MAR and should be read in accordance with the correlation table set out in Annex II to MAR. It follows that in the case of a violation of Art. 17 of MAR, the home country’s control principle applies.155 Thus, the competent authority is the authority in which the issuer has its registered office. The rationale behind the application of the homecountry-control principle is the goal of Art. 17 MAR to inform investors by enhancing market transparency. Moreover, in the Transparency Directive, it is explicitly stated that Supervision of an issuer of shares . . . for the purposes of this Directive, would be best effected by the Member State in which the issuer has its registered office.156

Nonetheless, the home country control principle should be interpreted and applied in correlation with Art. 6 of Regulation 2016/522, which defines the competent authority to which an issuer of financial instruments must notify the delay in disclosing inside information according to Article 17(4) and (5) of MAR.

7 Conclusion Disclosure of inside information is a means to prevent insider dealing, inform investors and safeguard the integrity of the market. To this end, the threshold for inside information is low and covers information that is not final and uncertain. Nonetheless, delineating the content and extent of the disclosure obligations in multistage events and protracted processes remains a difficult issue to address, even after MAR. There is still heated debate on the meaning of a ‘realistic prospect’, the notion of the ‘reasonable investor’ and the interrelation between the different requirements of the inside information. Consequently, it seems that we will need more ‘intermediate steps’ from the ECJ to achieve legal certainty and clarity referring to the disclosure of multistage events and protracted processes. From this point of view, the national case law has a complementary function fostering

155 156

See on this principle Lomnicka (2000), p. 324. Recital 6 of Directive 2004/109. See also Art. 21 (1) (3) of the same Directive.

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integration, highlighting interpretative issues and setting a common interpretative denominator in relation to the relevant insider law provisions. This is particularly the case for cross-border mergers, where the cross-border parameter adds a certain degree of complexity to the disclosure of inside information.

References Assmann H-D (2012) § 15. In: Assmann H-D, Schneider U (eds) WpHG. Dr. Otto Schmidt, Köln Avia L (2015) Imprécisions autour de la notion d’ information privilégiée: une occasion manquée? RLDA 106:23–27 Bonneau T, Drummond F (2010) Droit des Marchés Financiers. Economica, Paris Botopoulos K (2016) The use of inside information as a form of conflict of interests. In: Commemorative volume for L. Georgakopoulos. Athens, pp 609–620 (in Greek) Cai J, Song M, Walking R (2011) Anticipation, acquisitions, and bidder returns: industry shocks and the transfer of information across rivals. Rev Financ Stud 24:2242–2285 Campa J, Hernando I (2004) Shareholder value creation in European M&As. Eur Financ Manag 10:47–81 Conant L (2013) Whose agents? The interpretation of international law in national courts. In: Dunoff J, Pollack M (eds) Interdisciplinary perspectives on international law and international relations. CUP, Cambridge, pp 394–420 Cornett M, Tanyeri B, Tehranian H (2011) The effect of merger anticipation on bidder and target firm announcement period returns. J Corp Finance 17:595–611 Davies P, Worthington S (2016) Gowers principles of modern company law. Sweet & Maxwell, London Frowein G (2013) Pflicht zur Veröffentlichung von Insiderinformationen. In: Habersack M, Mülbert P, Schlitt M (eds) Handbuch der Kapitalmarktinformation. Beck, München, pp 226–276 Gullifer L, Payne J (2015) Corporate finance law. Hart, Oxford Hansen J (2016) Say when: when must an issuer disclose inside information? Nordic & European Company Law, LSN Research Paper Series no 16-03, pp 1–29 Hansen J (2017) Issuers’ duty to disclose inside information. ERA Forum 18:21–39 Hellgardt Α (2013) The notion of inside information in the Market Abuse Directive: Geltl. CMLR 50:861–874 Hitzer M (2012) Zum Begriff der Insiderinformation. NZG 15:860–863 Kalss S, Hasenauer C (2014) Aktuelles zur Ad-hoc-Publizität bei Beteiligungs- und Unternehmenstransaktionen. GesRZ, pp 269–277 Kalss S, Oppitz M, Zollner J (2015) Kapitalmarktrecht. Linde, Wien Klöhn L (2012) Das deutsche und europäische Insiderrecht nach dem Geltl-Urteil des EuGH. ZIP, pp 1885–1895 Klöhn L (2013) Der Aufschub der Ad-hoc-Publizität wegen überwiegender Geheimhaltungsinteressen des Emittenten (§ 15 Abs. 3 WpHG). ZHR 178:55–97 Klöhn L (2014) vor § 15. In: Hirte H, Möllers T (eds) WpHG. Heymanns, Köln Klöhn L (2015a) Inside information without an incentive to trade? What’s at stake in ‘Lafonta v. AMF’. CMLJ 10:162–180 Klöhn L (2015b) Ad-hoc-Publizität und Insiderverbot nach ‘Lafonta’. NZG 18:809–817 Koch P (2017) Disclosure of inside information. In: Veil R (ed) European capital markets law. Hart, Oxford, pp 345–392 Krause H, Brellochs M (2013a) Insider trading and the disclosure of inside information after Geltl v Daimler – a comparative analysis of the ECJ decision in the Geltl v Daimler case with a view to the future European Market Abuse Regulation. CMLJ 8:283–299

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Krause H, Brellochs M (2013b) Insiderrecht und Ad-hoc-Publizität bei M&A- und Kapitalmarkttransaktionen im europäischen Rechtsvergleich. AG, pp 309–339 Langenbucher K (2013) Zum Begriff der Insiderinformation nach dem Entwurf für eine Marktmissbrauchsverordnung. NZG 16:1401–1406 Langenbucher K (2016) In Brüssels nichts Neues? Der verständige Anleger in der Marktmissbrauchsverordnung. AG, pp 417–422 Lomnicka Ε (2000) The home country control principle in the financial services directives and the case law. EBLR 11:324–336 Mennicke P, Jakovou N (2016) § 13. In: Fuchs A (ed) WpHG. Beck, München Mittoo U (1992) Managerial perceptions of the net benefits of foreign listing: Canadian evidence. J Int Financ Manag Acc 4:40–62 Möllers T, Kernchen E (2011) Information Overload am Kapitalmarkt – Plädoyer zur Einführung eines Kurzfinanzberichts auf empirischer, psychologischer und rechtsvergleichender Basis. ZGR 40:1–26 Möllers T, Seidenschwann S (2012) Anlegerfreundliche Auslegung des Insiderrechts durch den EuGH. NJW, pp 2762–2765 Noia C, Gargantini M (2012) Issuers at midstream: disclosure of multistage events in the current and in the proposed EU market abuse regime. ECFR, pp 484–529 Papadopoulos T (2012) The market abuse directive and the notion of inside information. EEEΔ, pp 257–264 (in Greek) Paredes T (2003) Blinded by the light: information overload and its consequences for securities regulation. Wash Univ Law Q 81:417–485 Pfüller M (2016) § 15. In: Fuchs A (ed) WpHG. Beck, München Reul J (1991) Die Pflicht zur Gleichbehandlung der Aktionäre bei privaten Kontrolltransaktionen. Mohr Siebeck, Tübingen Schopper Α, Walch M (2014) Ad-hoc-Publizität bei zeitlich gestreckten Sachverhalten – zugleich eine Besprechung von VwGH 2012/17/0554. ZFR, pp 255–261 Shahar B, Schneider C (2011) The failure of mandated disclosure. Univ Pa Law Rev 159:647–749 Staikouras P (2015) Dismantling the EU insider dealing regime: the Supreme Court of Greece’s muddled interpretation of ‘inside information’. Law Financ Mark Rev 9:210–216 Tountopoulos V (2015) Capital markets law. Sakkoulas, Athens (in Greek) Veil R (2017) Insider dealing. In: Veil R (ed) European capital markets law. Hart, Oxford, pp 189–223 Verse D (2006) Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften. Mohr Siebeck, Tübingen von Klitzing J (1999) Die Ad-hoc-Publizität. Carl Heymanns, Köln Wymeersch Ε (2005) The future of financial regulation and supervision in Europe. CMLR 42:987–1010 You L et al (2013) An empirical study of multiple direct international listings. Glob Financ J 24:69–84

Vassilios D. Tountopoulos A graduate of the University of Athens School of Law, he pursued further studies in Göttingen, Germany (Georg August Universität), where he obtained a Magister Juris and a Ph.D. in company law. He is a full professor at the University of the Aegean and a visiting Professor at the University of Piraeus. Vassilios Tountopoulos is the author of a substantial number of books and articles. He is also a member of the scientific committee of various legal journals and reviews. Vassilios Tountopoulos is further an active lawyer at the Greek Supreme Court. He has previously served as a general counsel at the Hellenic Post and as member of various expert and working groups. He has served also as non-executive Member of the BoD of various companies.

Cross-Border Mergers and Cross-Border Takeovers Compared Matteo Gargantini

1 Cross-Border Reorganizations and the EU Internal Market While grounded on comparable regulatory aims, the EU legal frameworks for crossborder mergers (Directive (EU) 2017/1132) and, respectively, for cross-border takeovers (Directive 2004/25/EC) display remarkable differences. This chapter compares these legal tools with a view to analysing how they deal with common issues underlying mergers and acquisitions (M&A). Section 1 provides a general introduction to the economics of M&A transactions (Sect. 1.1) and explains how this is relevant for the integration of the EU internal market (Sect. 1.2). Section 2 compares the two legal regimes in the light of the agency problems of M&A transactions (Sect. 2.1) and highlights the different legal strategies adopted to manage those problems within the board of directors (Sect. 2.2), among shareholders (Sect. 2.3) and trough exit rights (Sect. 2.4). Section 3 concludes. The following analysis concentrates on listed companies, as these fall within the scope of the takeover bid directive (Article 1 Directive 2004/25/EC). In this chapter, a cross-border merger is understood as a merger between companies having their registered office in different EU member states (Article 118 Directive (EU) 2017/ 1132). The definition is more complex for cross-border takeovers, because the relevant transnational element may refer, under Directive 2004/25/EC, to different connecting factors depending on the matter. For instance, a takeover where an offeror domiciled in country A launches a bid on a company having its registered office in country B, while having its shares admitted to trading on a regulated market in country A, will be a cross-border takeover for some aspects (e.g. defensive measures) but not for others (e.g. disclosure duties: Article 4 Directive 2004/25/EC). For

M. Gargantini (*) University of Utrecht, Utrecht, The Netherlands e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_7

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both mergers and takeovers, investors’ domiciles may also play a role, for instance when the duty is triggered to publish a prospectus or an equivalent document. In the remainder of this chapter, the relevant connecting factors will be clarified whenever necessary.

1.1

Cross-Border Mergers and Takeovers as Reorganization Tools

This section provides a very synthetic—and necessarily incomplete—overview of the determinants of M&A corporate reorganizations, and on the different ways mergers and takeovers reflect them. The analysis relies on some basic elements of the new institutional economics approach to explain (part of) the reasons why firms may need to expand their boundaries through mergers or acquisitions (Williamson 2000). More legally-oriented readers can, therefore, proceed directly to Sect. 1.2 without losing the chapter’s train of thought. From an economic perspective, the optimal size of firms depends on several variables. Chief among them is the cost of centrally managing the factors of productions in a hierarchical context, on the one hand, relative to the cost of procuring those inputs on the market through free negotiations with independent third parties, on the other hand (Coase 1937). The variables that determine the optimal boundaries of firms are subject to frequent changes. Technological innovations and evolving market conditions may reduce transaction costs and make independent bargaining progressively more efficient than centralized coordination of production within a single firm. Take web-based innovations as an example. Facilitated contacts among a multitude of users of the same platform greatly reduce the costs of searching for new suppliers every time the need arises to look for a specific service or good. Vice-versa, other developments can ease hierarchical management by reducing the risk that firm growth leads, in large and complex firms, to excessive bureaucratisation (Penrose 1959). For instance, technological progress in information technology facilitates the management of large systems, either vertically or through flat organizational structures. By the same token, changing market conditions may make the aggregation of inputs within the same firm relatively more (or less) efficient over time. As the economic theory demonstrates, one reason why this happens is that relation-specific investments are prone to hold-up problems. These problems arise when contractual incompleteness gives one of the parties to a contract increased bargaining power in unforeseen circumstances and prevents her from credibly commit to not strategically exploiting such power to the other party’s detriment (Williamson 1975). This situation may, in fact, induce the weak party to underinvest, which results in a loss of welfare. In this context, centralized governance may avoid strategic behaviours that incomplete contracts inevitably facilitate (Grossman and Hart 1986; Hart and

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Moore 1990). As market conditions vary, the relative convenience of centralised governance over market-based transactions may equally change. These and many other variables, therefore, contribute to defining variable equilibria of business organizations. Combinations of previously independent firms may become desirable when the opportunity to develop synergies arises, and when integration exploits those benefits better than mere contractual coordination. From a purely economic perspective, the boundaries of the firm include all the inputs falling under the control of the entrepreneur (Grossman and Hart 1986, p. 692), irrespective of the legal tool enabling such control. From a legal point of view, however, different forms of organization can lead to this result. In the simplest legal form, a single company manages all the factors of production, so that one legal entity has the ownership right on those factors—or, in any event, the right to use those factors to run the business. When the firm takes the form of a group, those rights belong instead to different companies, so that a single entrepreneurial activity corresponds to multiple legal entities. Within groups, different companies rely on various governance mechanisms to ensure that their respective activities contribute to the common firm in a coordinated manner. The most common governance tool1 to ensure this coordination is the control of the general meeting, as this typically ensures the possibility of appointing the majority of the board of directors, thus securing control of the actual management of the company.2 There are, therefore, two primary forms of external growth. The first one is the transfer en bloc of the assets and sources of funding (liabilities) of a target company to an acquiring company. The second form is the creation (or enlargement) of a corporate group when an acquiring company gains control of a target company.3 These two alternative effects are the distinguishing features, respectively, of mergers and takeovers (Arts 88, 89, 90 and 119(2) Directive (EU) 2017/1132, for national 1 Other tools include contractual agreements whereby a company commits to complying with the instructions it receives from another member of the group (“contract of domination”), when allowed under the applicable company law. 2 Coordinated management of different companies within the same group triggers the duty to prepare consolidated accounts, so that the financial statements reflect the economic integration of those companies. Under Art. 22 Directive 2013/34/EU (Directive on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings), a company has to prepare consolidated accounts when it either has a majority of the shareholder voting rights in another undertaking, or it has in any event, as a shareholder, the right to appoint or remove a majority of the board members of another undertaking (a subsidiary undertaking), or it has the right to exercise a dominant influence over another undertaking of which it is a shareholder. By the same token, under IFRS 10 (§ B15; B35), applicable within the EU as per Regulation (EU) No 1254/2012, control arises when a company has control over another company when it has the power to direct its relevant activities. This power is conferred, among other things, by voting rights in the investee company conferring the power to appoint or remove the majority of the board members. 3 As takeovers are a very flexible tool, they have historically fostered both the enlargement of firm conglomerates and their dismantling (Johnston 2009, pp. 49–50). While the first function is somewhat intuitive, the second also relies on the acquisition of control, which in this case moves the company from a larger to a smaller group, such as one comprising only the transferred company and a special purpose acquisition vehicle.

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and cross-border mergers respectively; Art. 2(1)(a) Directive 2004/25/EC).4 This essential difference brings about the factual consequence that, while shareholders of the target company may, in principle and with some exceptions, retain their quality if they reject the offer to tender their shares (even when the bid is successful in light of its acceptance rate), this is not possible for mergers. While these effects are the essentialia of takeovers and mergers, other differences are recurrent. Takeovers inevitably maintain the bidder and the target companies as separate entities, thus creating (or enlarging) a corporate group. Mergers normally entail the dissolution without liquidation of the transferring company. However, national laws may also allow the transferring companies to survive the merger—and the ensuing transfer of all assets and liabilities, as well (Art. 117 Directive (EU) 2017/1132).5 Takeovers and mergers display further differences in terms of consideration paid (or offered) to the target company’s shareholders. When the business combination takes the form of a takeover, the target shareholders tendering their shares may receive either consideration in cash or, in an exchange offer, shares of another company (often the bidder), or a combination of the two. In a merger by acquisition,6 instead, all the shareholders of the transferring company have their previously held shares replaced with shares of the surviving company, in an amount defined by the exchange ratio. At the same time, shareholders of the surviving company are diluted of a corresponding measure. However, shareholders of the transferring company may also receive a cash payment, which member states have to allow at least up to 10% of the value of the surviving (or emerging) company’s shares issued in exchange (Arts 89 and 90 Directive (EU) 2017/1132).7 Just like the need to wind up the transferring company, limits to consideration in cash are mere naturalia of mergers. When member states allow cash payment in mergers to exceed the 10% threshold, the distance between takeovers and mergers may narrow down. In theory, nothing prevents member states from allowing full cash consideration (Grundmann 2012, p. 675; Bech-Bruun and Lexidale 2013, p. 110; differently Ventoruzzo 2010, p. 877), thus enabling fully-fledged cash-out

4

Of course, reorganization is not the only reason why companies merge on a cross-border basis. Merging with a vehicle such as a shell company established in another country is a common way to change the law applicable to the transferring company (for the EU context see, e.g., Johnston 2009, pp. 198 ff). Takeovers are not a substitute for mergers in this respect. 5 This peculiar scheme does not expressly fall into the scope of application of cross-border mergers (Arts 119(2) and 120 Directive (EU) 2017/1132) and will not, therefore, be further analysed here. 6 In case the merger leads to the creation of a new company, all the pre-existing companies are to be regarded as transferring companies in this respect. 7 No consideration is due, of course, when a subsidiary merges into the controlling company that holds its entire capital (Article 119(2)(c) Directive (EU) 2017/1132).

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mergers.8 In this case, the transfer of all assets and liabilities en bloc will remain the distinguishing feature of mergers vis-à-vis takeovers. Whether consideration in mergers can also take the form of shares issued by a company other than the surviving company remains unclear. If so, a company A might for instance set up a fully-controlled subsidiary, and then have this subsidiary merged—in the role of the acquiring company—with another company B whose shareholders would receive shares of company A. In this example, a merger might lead to an outcome comparable to that of an exchange offer carried out under takeover law,9 but the applicable rules—including those on shareholder decisionmaking—would remain those of mergers. At the national level, similar transactions are sometimes available under local instruments such as the UK schemes of arrangements. Some authors deem these “reverse triangular mergers” feasible under EU law as well (Armour and Ringe 2011, p. 162), but some doubts remain because the scope of application of national and cross-border mergers would seem to include only consideration consisting in shares of the acquiring company (Articles 89(1) and 119 (2)(a) Directive (EU) 2017/1132). In a cross-border context, the typical difference between mergers and takeovers— namely the dissolution10 of the target company versus the lack thereof, respectively—plays a special role because the companies involved in the business combination are subject to different laws. Consequently, takeovers and mergers offer, in a transnational scenario, alternative techniques firms may resort to when coping with different company laws. Cross-border mergers give the opportunity of levelling out the rules applicable to the firms involved by leaving just one company in place. To the contrary, takeovers do not affect those rules, as they let the involved companies survive. Whether one or the other technique is preferable depends, inevitably, on the circumstances. Using a pyramidal structure to facilitate control may make takeover acquisitions cheaper but, in the absence of a harmonised EU law for corporate groups, maintaining different companies may have remarkable costs. Corporate group laws will normally set an array of measures aimed to protect minority shareholders and other constituencies.11 While those measures can reduce the cost of raising capital by fostering investor protection, they inevitably complicate decision-making processes. Furthermore, unclear rules on corporate groups, for

8

This is confirmed by Art. 116 Directive (EU) 2017/1132, which extends some of the provisions on “standard” mergers under Article 88 to mergers where “the laws of a Member State permit a cash payment to exceed 10 %”. 9 Another way to achieve a similar result is by having company A issuing new shares for consideration in kind of company B shares by this latter’s shareholders (Articles 48 ff Directive (EU) 2017/1132). 10 EU provisions on cross-border mergers do not cover the transfer of assets and liabilities without dissolution of the transferring companies: see fn 5 above. 11 For this reason, the law on corporate groups can be a partial substitute for the mandatory bid rule (Grundmann 2012, pp. 721–722).

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instance as regards the (foreign) controlling entity’s ability to address binding instructions to its (local) subsidiary, may create legal uncertainty. However, the ability of cross-border mergers alone to make the regulatory framework more homogeneous within the company may be limited. Take labour law as an example. Directive 2001/23/EC curbs the surviving company’s ability to amend contracts entered into by the transferring company and its workers, and a merger shall not in itself constitute grounds for the termination of such contracts (Article 4). Consequently, cross-border mergers do not automatically lead to the creation of a homogeneous business organization, at least as far as employees are concerned (Kraakman et al. 2017, p. 194). More in general, keeping in place different companies under common control may reduce transaction costs of business combinations at least in the short run, because suddenly subjecting a potentially significant part of the newly-formed firm to new company law rules may be incompatible with an efficient transition and may, therefore, reduce the net value of synergies.12 This shows how takeovers can be not only a substitute for but also a complement to mergers. The combination of these techniques may in fact ease external growth because mergers may sometimes be feasible only when a takeover precedes them. Full integration of different companies through a merger may require some previous adjustments with a view to coordinating the productive factors of the firms involved. Takeovers may help make the organizations of the firms involved (including the terms and conditions of employment) gradually more homogeneous. Mergers’ ability to simplify the corporate group structure by replacing previously separate entities with one resulting company (Grundmann 2012, p. 669) may bring further benefits at a later stage. As mergers require cooperation between the boards of the companies involved, takeovers may be a prerequisite to successfully performing a merger whenever the target company’s directors oppose the business combination.13 While in these cases takeovers facilitate mergers, in other circumstances mergers may, reciprocally, facilitate takeovers. As this chapter will show more in detail,14 bidders may increase pressure to tender among shareholders by declaring in the offer document that their plans for the offeree company include a merger with the offeror (Art. 6(3)(i) Directive 2004/25/EC). The remainder of the chapter will further analyse this relationship of both competition and cooperation that characterises the two reorganization tools.

12

Taxation of unrealised capital gains is not anymore a concern for cross-border mergers, instead, after the entry into force of Directive 2009/133/EC (tax merger directive): Bech-Bruun and Lexidale (2013), p. 80. 13 See infra Sect. 2.2 for further analysis. 14 See infra Sect. 2.3.2 for further analysis.

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Firm Reorganizations in the EU Treaties from a Company Law Perspective

As a matter of principle, facilitating the aggregation of enterprises on a cross-border basis may allow firms to better exploit economies of scope and scale through external growth, if only because the broader the market where firms may seek for aggregations, the larger the number of potential combinations. It is also widely understood that cross-border combinations may lead to the creation of European groups of a size comparable to that of their global competitors. Therefore, the European Treaties have been considering cross-border reorganizations as a crucial element for the creation of an internal market from the very outset. At the same time, reorganizations have always been a particularly sensitive issue, because they normally bring along fundamental changes for shareholders, creditors and employees alike. Those changes easily involve large numbers of stakeholders, considering the typical scale of cross-border reorganizations, and may, therefore, become intractable from a political perspective. The crucial role of cross-border reorganizations has led to the inclusion of cross-border mergers in the European Treaties since the early stages of the European integration, mergers being back then the typical reorganization form (Grundmann 2012, p. 717). Mergers were part of the regulatory tools aimed at creating a European integrated market already in the Treaty establishing the European Economic Community signed in Rome in 1957 (Art. 220, third hyphen). The high sensitivity of mergers as firm reorganization devices, however, suggested referring the definition of specific harmonisation rules to ad hoc international conventions falling outside the scope of the Treaty. The new Treaty establishing the European Community continued to refer to an international convention the definition of rules aimed at securing the “possibility of mergers between companies or firms governed by the laws of different countries” (Art. 293). However, considering how delicate the issues was, it comes as no surprise that member states never adopted the draft Convention on the International Merger of 1972. Nevertheless, the European institutions took on the project for the creation of a European framework for—initially national, and then—international mergers. This became possible because the competence of the European law-makers under the Treaty included the adoption of directives aimed to attain freedom of establishment, including by “coordinating . . . the safeguards which, for the protection of the interests of members and others, are required by Member States of companies . . . with a view to making such safeguards equivalent throughout” the EU (Art. 44 (1) and (2)(g), now Art. 50(2)(g) Treaty on the Functioning of the European Union). This provision eventually became the legal basis underpinning Directive 2005/56/ EC on cross-border mergers of limited liability companies (Santa Maria 2009, pp. 8 and 61–62). The ECJ played a decisive role in unlocking the stalemate originated by member states’ reluctance to define a common set of rules on cross-border reorganizations (Armour and Ringe 2011). By leveraging on the direct applicability of the Treaties’

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provisions, including those concerning the freedom of establishment (ECJ Reyners), the ECJ stated that the Treaties’ referral to international conventions did not create a reserve of legislative competence vested in the member states (ECJ Überseering, §§ 54 and 60). Consequently, even in the absence of the international convention envisioned in the treaties, firms having their seats in a European country enjoy protection of their freedom of establishment when deciding to move their main seat to another European country. This also entails, in the Court’s view, the right of a surviving (or an emerging) company to maintain (or obtain) registration in a member state’s companies register subsequent to a merger with a transferring company having its registered office in another EU member state (ECJ SEVIC). SEVIC banned restrictions by the country of origin of the surviving company, but did not openly address restrictions applied by the country of origin of the transferring company. This was due to the facts of the dispute, which arose because the country of destination—i.e. the country of origin of the surviving company, Germany in that case—refused registration of the merger in its companies register. The parties reported no similar resistance by the country where the transferring company was registered (Luxembourg). Hence, the case only concerned inbound, as opposed to outbound, restrictions to companies’ freedom. However, this limitation had no substantial impact on the full recognition of cross-border mergers. First, SEVIC was immediately regarded as the expression of a general principle mandating recognition in both the acquirer’s and the acquiree’s legal system of cross-border mergers carried out in conformity with the rules applicable to purely national mergers (Santa Maria 2009, p. 61). Second, and most importantly, Directive 2005/ 56/EC was adopted on 26 October 2005, while the ECJ rendered the SEVIC decision on 13 December 2005. Although SEVIC could obviously have no relevant impact on the legislative process that led to the adoption of Directive 2005/56/EC, the ECJ activism in enforcing companies’ freedom of primary and secondary establishment15 prompted a more energetic reaction by the Commission and the Council. From a political perspective, it became clear that member states could not simply freeze legal reforms on cross-border reorganizations. Rather, the ECJ case law had given member states a choice between losing the control on the process that was fostering those reorganizations, on the one hand, and contributing to shaping it on the basis of the power conferred on (the Commission and) the Council under Art. 44(2)(g) of the Treaty establishing the European Community, on the other hand. Article 44(2)(g), together with the general statement under Article 44(1) setting the purpose to attain freedom of establishment, was also the basis for Directive 2004/ 25/EC on takeover bids (Santa Maria 2009, p. 126). More in general, takeovers also fall into the scope of application of the freedom of establishment, which protects them according to the scholarly interpretation of the ECJ case law (on SEVIC see Siems 2007, pp. 315–316).

15

See ECJ, Centros and ECJ, Inspire Art for secondary establishment; ECJ Überseering for primary establishment.

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Against this backdrop, the adoption of the takeover bid directive fostered the integration of the market for corporate control through increased—albeit limited— harmonization. First, it defined a closed number of options on some key issues such as pre- and post-bid defensive measures, thus reducing the information costs firms have to incur when ascertaining the rules applicable to their targets (Art. 12).16 Second, it set some common set of rules for minority protection, although the ability of some of those measures—and especially of the mandatory bid rule—to deliver the desired outcomes in terms of homogeneity and investor protection is questionable (Enriques 2004). Third, it introduced a passport system that limits, while not entirely ruling out, the host member states’ ability to require additional information (Art. 6), with a view to reducing the costs of cross-border takeovers. Fourth, specific conflictof-law provisions that define the applicable law and allocate supervisory powers among the relevant authorities further reduce legal uncertainty for cross-border acquisitions of control (Art. 4). All these factors limit the space left to member states for restricting the exercise of fundamental freedoms on the grounds of public policy, public security or public health (Article 52 TFEU).

2 Mergers and Takeovers: Comparing the Legal Regimes 2.1

Agency Problems in Mergers and Takeovers

As in many other major corporate events, agency problems can be very acute in the context of mergers and takeovers, too. In the simplest scenario, conflicts of interest may involve shareholders taken as a whole, on the one side, and directors, on the other side. The interests of the two groups may diverge, for instance, because of the managerial incentive to oppose welfare-improving reorganizations that would jeopardise their positions. Governance devices aimed at reducing such conflicts of interest may deliver suboptimal results, if only because they might on their turn be prone to other agency problems or, sometimes, to legal restrictions. For instance, the grant of golden parachutes and similar incentive-based compensation mechanisms may divert value from the company and may be subject, in some jurisdictions, to strict scrutiny or even to outright bans (Kraakman et al. 2017, pp. 67–68 and 221). Severance agreements may also incentivise managers to enter inefficient control transactions or, vice-versa, may turn out to be a defensive measure when their size is significant (Ventoruzzo et al. 2015, p. 524). Just like national reorganizations, cross-border mergers and cross-border takeovers are subject to the symmetric risks that conflicted managers may favour

16

This is also the rationale underlying listed companies’ disclosure duties under Art. 10 directive 2004/25/EU, which mandates publication of information that may be relevant to potential bidders (such as the ownership structure, the governance rules concerning board members’ appointment, and the restrictions on voting rights).

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inefficient transactions, for instance because they indulge in empire building, or vice-versa hinder welfare-increasing reorganizations, for the fear to lose their job (for mergers, see Kraakman et al. 2017, pp. 185–186). When reorganizations occur on a cross-border basis, however, these agency problems become particularly problematic for several reasons. For instance, mergers lead to the change of the applicable company law for the shareholders of the transferring company, which can jeopardise the safeguards minorities relied upon when they decided to invest in the first place (Kurtulan 2017). Despite the stability of the applicable company law, cross-border takeovers also raise specific problems, if compared to their national equivalents. Controlling entities from different countries often display equally different entrepreneurial styles, depending on the institutional context of their country of origin (Johnston 2009, pp. 143–144). This easily emphasises the agency problems that any takeover involves. Experience shows that concerns voiced on takeovers from various stakeholders are normally louder when the bidder comes from abroad. For employees, this may reflect the fear that a radically new group governance lead in the long run to job losses or to a deterioration of the working conditions. Absent the typical restraints that media and authorities exert—often informally, through their soft power—on local managers, corporate restructurings may indeed be more radical when the new controlling entity is domiciled in another country. This different context further polarises the agency problems highlighted above. On the one hand, cross-border takeovers may improve the targets’ profitability more than purely national transactions. On the other hand, and for the same reasons, cross-border takeovers may also exacerbate the risk that changes of control waste firm-specific investments by managers (Coffee 1988, p. 447) and employees alike. As these human capital investments often rely on implicit contracts, they are particularly at risk in case of change of control (Enriques 2011, p. 625). At least from a theoretical point of view, one would expect that no rational bidder—not even when driven by the intention to loot its new subsidiary—would squander the value of firm-specific investments within the target (Gilson 1992, p. 74). However, the problem remains that controlling entities coming from another managerial tradition may be unable to identify firm-specific investments based on implicit contracts entered in an unfamiliar foreign context, not to mention that they might even actively seek to appropriate part of the inherent value of those investments (Johnston 2009, pp. 53–54). For all the reasons mentioned above, cross-border reorganisations—whether through mergers or takeovers—display specific features if compared with their national equivalents. Other differences distinguish, of course, cross-border mergers, on the one hand, from cross-border takeovers, on the other hand. The main dissimilarity lies with the fact that, when the acquiring and the target companies are not in a relationship of control, takeovers are easier to pursue than mergers because, with the clarifications provided below, they do not require cooperation from the target board of directors. On the flipside of the coin, transferring companies may more easily freeze restructurings when these take the form of a merger.

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Taken in isolation and, most importantly, all other conditions being equal, mergers therefore require previous agreements among a larger group of stakeholders, which has an obvious impact on their feasibility. In light of the agency problems highlighted in this section, mergers thus have in principle a better ability to protect production teams from external threats, but they are also more prone to agency problems when the incumbents’ resistance to the reorganization is due to mere managerial entrenchment. The situation is symmetric, of course, for takeovers. Because of their ability to reduce frictions in control acquisitions, takeovers may facilitate welfare-enhancing aggregations but, at the same time, they carry the risk of making inefficient control changes possible. Of course, many caveats apply to the previous analysis, for the simple reason that the effects of rules on reorganizations are highly sensitive to the legal and factual context. For reasons of space, only a few examples will be mentioned below, including in particular the role of different ownership patterns. However, not only do cross-border mergers and cross-border takeovers look differently in different legal and market contexts, but even within the same scenario the regulation of such transactions can lead, in practice, to divergent results. These results are often impossible to anticipate without considering the idiosyncratic features of each transactions and of the parties involved (for this reason, some scholars submit that each company should enjoy broad discretion in the definition of its own takeover regime: Enriques and Gatti 2015). As the previous analysis demonstrates, neither the capacity to block nor the ability to foster reorganizations has a bijective correspondence with shareholder protection. The ability to prevent (or to facilitate) a reorganization may, in fact, hinder (or ease) welfare-increasing as well as value-decreasing transactions. The crucial element in this respect is the allocation of the power to decide whether to pursue a reorganization, together with the relative efficiency of the governance devices regulating such power (which include the remedies available for breaching the rules governing such devices). The following sections will address these aspects from the point of view of the board involvement (Sect. 2.2), of the applicable rules on collective decision-making (Sect. 2.3), and of the exit strategies concerning shareholders (Sect. 2.4). Each section also includes some remarks on the techniques national rule-makers may resort to, as a consequence of minimum or incomplete harmonisation, with a view to modifying the equilibria between managers and shareholders, and among shareholder themselves. For limitation of space, the analysis does not include other corporate constituencies such as employees (other than directors) and creditors.

2.2

Board Involvement

Under EU law, cross-border mergers typically require the cooperation of the target’s board of directors. Unless otherwise provided, transnational mergers are subject, as for their procedural steps, to the national rules implementing the EU provisions on

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national mergers (Article 121(1)(b) Directive (EU) 2017/1132). These provisions also address the decision-making process (Art. 121(2)) and, therefore, the preparation of the draft terms of the mergers together with the written report explaining those draft terms and setting out their legal and economic grounds. The responsibility to draft these documents lies with the management or administrative organ of the merging companies (Articles 91 and 95). Articles 122 and 124 follow suit and entrust the preparation of the draft terms of cross-border mergers and the written report upon the management or administrative bodies. One may wonder whether shareholders might directly submit merger proposals on the basis of their right to put items on the agenda of the general meeting, if accompanied by a justification or a draft resolution (Article 6(1)(a) Directive 2007/ 36/EC; similar doubts have historically affected the US system as well: Manne 1965, p. 117). However, the contents of the draft merger terms would seem to require, in the vast majority of the cases, direct access to updated accounting data (Articles 91 and 122 Directive (EU) 2017/1132).17 Moreover, the merger process may include the preparation of an interim accounting statement that dates back 3 months at most (Article 97(1)(c)) and that has to take into account any interim depreciation and provisions as well as the material changes in actual values not shown in the books (Article 97(2)). In general, scholars assume that board cooperation is an essential element in the merger process (Papadopoulos 2010, p. 5; Grundmann 2012, p. 718; with regard to the schemes of arrangement that in the UK work as a substitute for mergers Kershaw 2016, §§ 2.33 and 2.39–41). Consequently, the shareholders’ role against managers opposing a business combination is normally believed to consist, rather than in pushing forward a merger proposal, in removing the reluctant directors and replacing them with others ready to undertake the project.18 Therefore, the necessity to have the board approval for the merger project to go through gives directors a frustrating measure that is more powerful than any other available in the context of a takeover, even in the absence of a passivity rule. In practice, however, mergers may become easier when the project includes some benefits for the incumbent management. These benefits may, for instance, take the form of new positions in the acquiring or resulting company, or even of more straightforward side payments to the directors of the transferring company. These and other perquisites have traditionally accompanied mergers (Manne 1965, p. 118), and their ability to skew managerial willingness to enter a merger process is still well-known, so much so that they require specific disclosure in the draft terms of the cross-border merger (Article 122(h) Directive (EU) 2017/1132). It is therefore up to

17

For instance, calculating a meaningful share exchange ratio—which also requires detailed explanation in the merger report (Arts 95 and 124 Directive (EU) 2017/1132)—might prove impossible, in practice, without accessing (partially) undisclosed accounting data and inside information. For this reason, the judicially-appointed experts charged with the responsibility of drafting an opinion on the merger conditions’ fairness under Articles 96 and 125 are entitled to obtain all the relevant information from the merging companies. 18 This might occur through a general meeting vote, possibly anticipated by a takeover when the majority of shareholders would not be in favour of the transaction.

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the shareholders to assess whether such benefits lead to a detrimental conflict of interest that justifies rejection of the merger proposal or whether the merger would still increase shareholder value even if managers have a stake in it. Takeovers’ success requires no active managerial cooperation, instead. The role of the target’s board of directors in cross-border mergers, on the one hand, and in cross-border takeovers, on the other hand, looks therefore very different on paper. One may wonder whether the same holds true in practice, however. This question seems to be justified for at least two reasons. The first reason is that, while side payments may streamline mergers, defensive measures may facilitate directors’ entrenchment against hostile bids, too, so that the distance between the two forms of reorganization might narrow down in practice. The second reason lies in the ownership structure of the target company, because what works for dispersed shareholdings may not work, or may reach opposite effects, for concentrated ownership. Let us consider defensive measures first. If managers can resort to frustrating devices, they can also credibly threaten to prevent hostile takeovers, as well as mergers. Take for instance post-bid defensive measures.19 Increasing company’s capital to make the acquisition more expensive or launching a share buy-back to reduce the number of outstanding shares available for tender may easily jeopardise a bid’s success (Clerc et al. 2012, p. 169). This shows how defensive measures may facilitate directors’ entrenchment, thus reducing ex-ante the disciplining effect of takeovers and preventing ex-post shareholders’ ability to tender their shares at convenient prices. However, those measures can also protect shareholders from the adverse consequences of collective action problems arising from pressure to tender (see also Sect. 2.3). Even if no active cooperation is needed from the board, the ability of (actual or potential) bidders to challenge managerial opposition to a takeover will depend on the array of defences the board may resort to. Any comparison in this respect cannot disregard national rules, both because the takeover bid directive leaves broad margins to national law-makers in the definition of the regulatory framework for frustrating measures, and because the very availability of those measures largely depends on the company law applicable to the target entity. Paradoxically, while measures aimed, at least in theory (Recital 1 and Article 1 Directive 2004/25/EU), to foster harmonisation in takeover law fall short of delivering a homogeneous regulatory framework, national company law rules often display broad similarities on the board’s role. As for takeover law, suffice it to recall that Directive 2004/25/EU defines a set of common rules that constrain certain defensive measures (Articles 9 and 11 Directive 2004/25/EC). Post-bid defences, for instance,20 are subject to a board neutrality rule, which subordinates to the prior authorisation of the general meeting any action taken

19

For the sake of simplicity, pre-bid measures are not considered in detail here. Pre-bid defensive measures are subject to a breakthrough rule, which neutralises, pending an offer and during the first meeting after the offer period, multiple voting rights as well as restrictions to voting rights and share transfers (Art. 11 Directive 2004/25/EC). 20

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by the board—“other than seeking alternative bids”—which may frustrate the bid or prevent the bidder from acquiring control of the target company (Article 9(2) Directive 2004/25/EC). However, the same Directive also gives member states the option not to apply those limitations—without prejudice to the companies’ freedom to adopt them voluntarily (Article 12(1)–(2)).21 The leeway member states have in designing national laws becomes even broader for cross-border takeovers, because the Directive also gives member states the option to exempt companies from applying the limitations to defensive measures when the bidder, or its controlling entity, would not reciprocally apply them if it were the target of a takeover (Article 12(3) Directive 2004/25/EC). As a consequence of these provisions, even within each member state, the applicable rules may vary from cross-border takeover to cross-border takeover, depending on the targets’ and the bidders’ choices. First, targets may decide to adopt anti-frustration rules (opt-in) when their national law does not mandate them. Second, they may be subject to those limitations or not, depending on their bidder’s regime, when they can reciprocate this latter’s defensive rules. As a result, the regime of the defensive measures in the EU is rather patchy, because of the different choices member states took on the optional regimes and the reciprocity rule (European Commission 2012, p. 3). This lack of homogeneity among member states, and among companies within each member state, would seem to make any overarching comparison between the regimes of cross-border mergers and cross-border takeovers extremely difficult. However, while inevitably remaining sensitive to the specific circumstances, variations of legal and bylaws provisions on cross-border takeover may not be as broad as it might seem at first sight. As mentioned, different rules on board neutrality do not in fact necessarily lead to an equally different managerial discretion. Passivity rules may be trivial if company law provisions already restrict managerial access to frustrating measures, including by requiring shareholder approval (Kershaw 2007). This is the case at least in some major EU jurisdictions (Gerner-Beuerle et al. 2011), so that, absent shareholder consent, boards of target companies will often have a passive role in cross-border takeovers regardless of the national choices on board neutrality and reciprocity towards foreign bidders. Rules affecting, directly or indirectly, the role of the board in cross-border mergers are not totally immune to national discretion, either. Examples we have already mentioned are the different treatment of side payments and, possibly, variable shareholder influence on the board (Sect. 2.1). However, harmonisation is higher than in takeover law, and it ensures the board has a decisive role in determining the outcome of a merger. There is, at any rate, another more obvious reason why board involvement in mergers does not necessarily represent an obstacle to reorganizations. This reason

21

The rule applies by default from the time the board of the target company receives the information that the bid was launched, but member states may mandate an early application (for instance from the moment when the board is aware a bid is imminent).

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depends, as mentioned in Sect. 2.1, on the ownership pattern of the target company. When the company is under the control of a shareholder (or of a coalition of shareholders), the most relevant agency problems concern the relationship between the controlling shareholder(s) and the managers, on the one hand, and minorities, on the other. In the case of a merger, shareholders of the transferring company that are not large enough to block the reorganization may see their shares replaced with those of the acquiring or the emerging company (and occasionally with cash) at an unfavourable exchange ratio, just like minorities of the surviving company may, symmetrically, be excessively diluted. In this context, receiving board approval is not a matter of concern for the incumbent shareholder(s), and minority protection measures rely on different techniques, including supermajority approvals at the general meetings or independent assessment of the exchange ratio. Concentrated ownership may make the role of the board much less relevant in takeovers, too. When a shareholder has the absolute majority of voting rights, hostile takeovers are impossible from the outset. When the shareholder has de facto control, corporate control is contestable, but board decisions to adopt frustrating measures will practically depend on the controlling shareholder’s choice, because this will have the ability to remove directors otherwise. Just like in mergers, minority protection relies therefore on other tools, which we will analyse in the next sections.

2.3

Shareholder Information and Approval

This section briefly analyses shareholder involvement in cross-border mergers and cross-border takeovers. Both these forms of reorganization rely on shareholder approval to go through, so that the agency problems they have to cope with are sometimes similar. The legal techniques of the two regimes are often quite different, however. For the sake of exposition, Sect. 2.3.1 analyses how Directive (EU) 2017/ 1132 and Directive 2004/25/EC cope with information asymmetries with a view to putting shareholders in a condition to make informed decisions. Section 2.3.2 addresses issues involving the dynamics of collective decision-making in the two restructuring models.

2.3.1

Information Regimes for Cross-Border Mergers and Cross-Border Takeovers

Both cross-border mergers and cross-border takeovers rely on shareholder approval as a key decision-making mechanism. A genuine consent of shareholders requires these have sufficient information at their disposal to be aware of the consequences of their decisions. The two regimes, therefore, mandate the dissemination of documents aimed at informing the shareholders called to vote on the merger or to accept (or reject) the offer. A combination of conflict-of-law rules and partial harmonisation

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of procedural and substantive rules reduces the costs and the legal uncertainties of mergers and takeovers involving entities located in different member states, thus facilitating cross-border reorganisations. The two regimes also resort to a third-party assessment by persons not involved in the transactions, but they do so with different intensity. Let us see these rules more in detail. Cross-border mergers require the preparation (Article 122 Directive (EU) 2017/ 1132) and the publication via companies register (Article 12322), at least one month in advance of the general meeting convened to vote on the reorganization, of the common draft terms. These are drawn up by each of the merging companies with identical contents.23 An explanatory report prepared by the board accompanies the draft terms. It explains and justifies the legal and economic aspects of the crossborder merger and the implications thereof (Article 124). Cross-border mergers therefore rely on the publication of the same merger document by each of the companies involved. Because each country has its own draft merger terms published under the local rules, there is no need to set up a procedure that ensures (mutual) recognition of merger documents. However, financial supervisors also play a role when the cross-border merger requires a prospectus, or when an exemption for the publication of a prospectus requires their intervention. When the value of the new shares issued by the surviving company and the number of the transferring company’s shareholders exceeds the applicable thresholds,24 a prospectus is in principle required. The same applies for listed companies—which are the only ones analysed here—when the new shares are admitted to trading on a regulated market and exceed the materiality threshold referred to the same class of shares already listed.25 Here, the transaction will enjoy the prospectus passport regime, so that approval is required only by the authority where the surviving company has its registered office (Article 17 Directive 2003/71/EC; Article 24 Regulation (EU) 2017/1129).26 The host competent authorities may require a translation only for the prospectus summary (Article 19 Directive 2003/71/EC; Article 27 Regulation (EU) 2017/1129).

22

Shareholders have the right to inspect the draft merger terms and their accompanying documents (Art. 97 Directive (EU) 2017/1132). 23 EU law defines a minimum content for the draft terms of cross-border mergers, so that the boards involved are free to add further information jointly. Simplifications are allowed for companies that publish the drafts on their website. 24 Namely 150 shareholders, other than qualified investors, and an amount defined at national level between 100,000 and 5,000,000 € (Articles 1(2)(h) and 3(2)(e) Directive 2003/71/EC), soon to become 1,000,000 and 8,000,000 respectively (Articles 1(3) and 3(2)(b) Regulation (EU) 2017/ 1129). 25 Namely 20% under the new regime (Article 1(5)(a) Regulation (EU) 2017/1129). 26 This authority will be competent because the prospectus regime for shares hinges upon the issuer registered office as a connecting factor: Art. 2(1)(m) Directive 2003/71/EC; Art. 2(m) Regulation (EU) 2017/1129.

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For both public offers and admissions to trading on a regulated market, if the financial supervisor deems the merger document equivalent to a prospectus,27 the company is not required to publish a fully-fledged prospectus. No passport system applies in this context, so that the competent authority in each member states where the exemption is to be used assesses the equivalence of the document (ESMA 2017, Q30, also encouraging cooperation among the competent authorities when carrying out the assessment). In the future, however, the procedure for cross-border mergers will enjoy a smoother regime in this respect, as the new EU prospectus regulation does not require a preliminary vetting for this exemption to apply (Article 1(4) (g) and 1(5)(f) Regulation (EU) 2017/1129).28 Takeovers also require the preparation of an information document (the offer document), whose minimum contents are defined at EU level (Article 6(2) and (3) Directive 2004/25/EU). The EU regime does not mandate administrative vetting in this case, but for cross-border takeovers approval by the competent authority grants a form of softened mutual recognition. In particular, once approval is given, the document is recognised in any other European country,29 but the host country authorities retain remarkable powers. First, they may require a translation of the entire offering document in a local language. Second, they may ask the offeror to provide additional information on locally-relevant items, such as the formalities for the acceptance of the bid and the payment of consideration, or the applicable tax arrangements.30 As mentioned, both (cross-border) mergers and (cross-border) takeovers also rely on some forms of third-party evaluation of the transaction.31 This is especially the case for mergers, which require an independent assessment of the transaction terms and conditions (and in any case of the fairness and reasonableness of the exchange

27 Equivalence does not require that all the information mandated under the applicable prospectus schemes be given (see already CESR 2003). 28 Other powers will remain, however, such as the power to “require issuers, offerors or persons asking for admission to trading on a regulated market . . . to provide information and documents” (Art. 32(1)(b)). 29 While the wording of Art. 6(2), par. 2, only refers to recognition by member states (other than the state of first listing) where the company has its shared admitted to trading, the same rule applies a fortiori to all the other EU countries (Von Lackum et al. 2008, p. 113). 30 It is debated whether the competent authorities of member states other than those where shares are admitted to trading on a regulated market have the power to request additional information: see Von Lackum et al. (2008), p. 113, for the negative; Article 38-II Consob Reg. No 11971/99 (Italy) for the positive. 31 Both regimes also provide shareholders with information concerning the implications of the reorganization for other stakeholders. The management report on cross-border mergers analyses the implications of the cross-border merger for members, creditors and employees (Art. 124 (1) Directive (EU) 2017/1132). As for takeovers, the opinion released by the board of directors also addresses the effects of the bid on employment. Furthermore, where the board of the offeree company receives “a separate opinion from the representatives of its employees on the effects of the bid on employment, that opinion shall be appended to the document” (Art. 9(5) Directive 2004/25/ EU).

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ratio). The assessment is carried out by an expert appointed, or at least approved, by the judicial or administrative authority (Articles 96 and 125 Directive (EU) 2017/ 1132).32 For takeovers, the board as a whole performs a similar function, as it has to release its opinion on the bid and its reasons. The opinion has to address, among other things, the board’s views on the “effects of implementation of the bid on all the company’s interests” (Article 9(4) Directive 2004/25/EC). The independent assessment of cross-border mergers is by definition non-conflicted.33 This may not be the case for the board opinion on takeovers, instead, not only because directors may be biased against the change of control as the previous analysis shows, but also because they may be related to the offeror (up to the extreme case of a management buyout). For these reasons, some jurisdictions require a separate opinion from the independent directors when the bidder is a controlling shareholder (or a controlling coalition of shareholders) or a director.34

2.3.2

Collective Decision-Making

Despite their similarities, mergers and takeovers display remarkable differences as regards their collective decision-making procedures. Merger conditions are in principle35 subject to approval by the general meeting of shareholders both within the target and the acquiring company (Article 126 Directive (EU) 2017/1132). Each of the general meetings involved will be subject to its own company law (Article 121(1)(b)). Such law will determine the applicable quorum, in compliance with the minimum supermajority requirements set forth at European level.36 In particular, general meeting resolution shall have approval, for each class of shares, of a majority of at least two thirds of the votes represented at the meeting or, as an alternative, of the simple majority of the votes represented as long as at least half of the subscribed capital is represented (Article 93 Directive (EU) 2017/1132; differently Kraakman et al. 2017, p. 184). Takeovers are different in both respects. First, they require approval by the shareholders of the target company alone. To be sure, company law applicable to the bidding company (Article 4 Directive 2004/25/EC) may mandate general

32

Exemptions are allowed in some circumstances, but companies taking advantage of them face higher litigation risk (Art. 114(1) Directive (EU) 2017/1132). 33 Judicial appointment or approval should reduce the risk that evaluations be biased in favour of the incumbents (on the risk of abusive recourse to independent opinion see Macey 2013). 34 See e.g. Italy (Article 39-II Consob Reg. No 11971/99). 35 Some deviations apply for the general meeting of the acquiring company when shareholders have enhanced rights of inspection of the documents relevant to the merger, provided that a qualified minority has the right to request that the general meeting be convened (Arts. 94, 111 and 113 Directive (EU) 2017/1132). 36 Most major EU jurisdictions have set more demanding requirements than the EU minimum thresholds: Kraakman et al. (2017), p. 184.

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meeting approval in case the takeover leads to a relevant substantial change,37 but this remains an exception. Second, the approval does not take the form of a general meeting decision, as the bid addresses each shareholder individually. This has relevant consequences on the agency problems takeovers entail, which we will now briefly address.

Pressure to Tender Takeovers do not require by default an acceptance rate as high as the supermajority quorums under the merger regulation. A takeover aimed at obtaining control of a company may succeed even if the shares tendered, together with those the bidder already owns, are sufficient to reach a simple majority at the general meeting of shareholder. Of course, this will depend on the preferences of each offeror, who may decide to make the bid conditional upon acceptance by a larger number of shareholders. The takeover acceptance system determines well-known collective action problems that may lead to suboptimal outcomes in the reallocation of control. On the one hand, the offeree shareholders may be willing to tender at a price lower than the estimated value of the shares with no change of control, simply because they may fear that if the takeover succeeded they would be locked into a less valuable company38 (pressure to tender: see Bebchuk 1985, pp. 1720–1723). An easy way to increase the pressure to tender to the point that acceptance becomes a dominant strategy is to make the bid conditional upon acceptance of a number of shareholders sufficient to ensure control of the (annual or even extraordinary) general meeting. On the other hand, the symmetrical situation may arise. If shareholders believe the control change will increase the company’s value and that the offer price does not fully reflect such expected value, they might refrain from tendering (free riding). Coordination problems arise because the typical takeover bid does not offer shareholders a way to manifest their preference other than by tendering their shares. This decision-making mechanism does not distinguish between tendering shares because of the fear to lose value in case the bid is successful from tendering shares because the price is deemed fair. Absent a mechanism for shareholders to coordinate their actions, telling spontaneous acceptances from coerced ones is often impossible in practice. There are of course various techniques to reduce, if not to eliminate, the pressure to tender. However, those measures are subject to limited harmonisation. Defensive measures regulated under Article 9 Directive 2004/25/EC are one of these 37

See e.g. Article 2361 Italian Civil Code, which prevents acquisition of shareholdings when their nature and size result in a substantial modification of the company’s object as specified in the articles of association. These may, therefore, need to be amended for the offer to go through. 38 A potential decrease in the company’s value may come from the new managers’ inability to run the business properly (including by extracting higher private benefits of control) or from increased concentration of ownership that makes the company less contestable (Psaroudakis 2010, p. 552).

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mechanisms, as directors may hinder the success of the takeover if shareholders give their approval (see Sect. 2.2). To the contrary, non-harmonised measures may substantially vary from country to country. Some of them, such as extended or two-tiered acceptance periods when the bidder reaches certain critical ownership thresholds, involve enhanced exit rights and will be considered in Sect. 2.4. Another way to incentivise non-coercive offers is to grant their arrangers an exemption from the mandatory bid rule in case they trespass the relevant threshold (as determined under Article 5(3) Directive 2004/25/EC). Just like the measures directly aiming at reducing the pressure to tender, exceptions from the mandatory bid rule are not fully harmonised (Article 4(5) Directive 2004/25/EC enables national deviations, provided that the general principles of Article 3 are complied with). The only harmonised general exemption is granted when the bidder gains control following a voluntary bid to all shareholders for all the shares they hold (Article 5(2)). Offers including all the outstanding shares are less coercive than partial bids because they reduce the risk that existing shareholders end up holding minority stakes in a company controlled by a new dominant shareholder. However, these offers are far from eliminating the pressure to tender, because they do not remove the risk that shareholders be worse-off if they do not tender (Bebchuk 1987, pp. 925 ff.). For this reason, some member states provide for exemptions when bids are structured in a way that enables shareholders to express their views on the offer independently of their decision to tender (Bebchuk 1985, p. 1748). In Italy, for instance, no mandatory bid rule applies when the control threshold is crossed, essentially, in the context of an offer concerning at least 60% of the shares as long as the tender is approved by a majority of independent shareholders through a separate vote (Article 107 Italian Consolidated Law on Finance). For all these measures aiming to reduce the pressure to tender, national law39 will, therefore, be crucial in determining the bidder’s ability to coerce shareholders and, symmetrically, the level of investor protection. Cross-border takeovers do not, therefore, enjoy harmonisation in this respect, so that investor protection is uneven across the EU and prospective bidders will need to ascertain the applicable rules on a case by case basis. For cross-border mergers, the voting mechanism cleanses shareholder approval from any form of pressure to tender, instead. Shareholders deeming the exchange ratio insufficient can just vote against the proposal with no fear that this may lead to a suboptimal result. However, bidders may instrumentally use mergers to increase the pressure to tender in the context of takeovers. Offerors can—and often do—launch takeover bids that envision subsequent mergers in case those takeovers are successful, and anticipate that the exchange ratio in those mergers might be lower than the

39 In cross-border tender offers, the applicable rules will be those of the member state where the target company has its registered office (Article 4(2)(e) Directive 2004/25/EC). This connecting factor becomes relevant when the company has its shares listed in a regulated market located in member states other than that where the company has its registered office (Article 4(2)(b)).

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price initially offered for the tender offers.40 The effect is magnified when the target company has its shares traded on a regulated market (or a multilateral trading facility providing liquidity) while the prospective acquiring company does not. A merger looming after the expiration of the acceptance period of the offer may worsen the pressure to tender because, if the bidder gains control of the target, minorities may not be able to prevent the general meeting from approving the merger. Even if the bidder does not reach the minimum threshold needed to squeeze-out minorities under national takeover law (see Sect. 2.4 below), she might in fact still be able to control the extraordinary general meeting. The supermajority required for merger approval under EU law is lower than the squeeze-out threshold (Papadopoulos 2010, p. 10), and shareholder apathy in general meetings broadens the difference in practice. As a consequence, envisioning a merger helps set up coercive offers. This may on its turn contribute to making the market for corporate control either less or more efficient depending on the prevailing effect out of two alternative ones: the combination may in fact worsen the pressure to tender for those disliking the bidder, but it can also reduce free-riding problems in the opposite scenario. Once again, telling which effect dominates may prove impossible unless shareholders can express their preference independently of their decision to tender. For this reason, for instance, under the Delaware law41 two-step freeze-outs or secondstage mergers face default restrictions that may be waived—unless the company bylaws provide otherwise and if other applicable conditions are met—if a supermajority of disinterested shareholders votes in favour at the general meeting (Gilson and Gordon 2003).42

40

Takeovers and mergers may interact in a somewhat symmetrical way, too, when mergers lead to a control change that triggers the mandatory bid rule under (national laws implementing) Article 5 Directive 2004/25/EU: see Sect. 2.4 below. 41 See Delaware Code Ann. tit. 8, § 203 (setting a default rule preventing business combination with any interested stockholder for a period of 3 years following the time that such stockholder became an interested stockholder, unless some conditions are met including approval by the board of directors and authorization at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3 per cent of the outstanding voting stock which is not owned by the interested stockholder). 42 Other protective mechanisms rely more on the scope of application of the entire fairness review by the court. Shareholder approval is an element taken into account when relaxing the standard, but such approval is disentangled from pure tendering only in some circumstances (e.g. for long-form mergers not preceded by a takeover—so-called “one-step freeze-out”) but not in others (e.g. for short-form mergers preceded by a takeover—so-called “two-step freeze-out”). For a detailed review see Ventoruzzo (2010).

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Free Riding Moving now to the opposite problem of free-riding, a relatively common way to reduce this potential market failure consists in granting shareholders the opportunity to have a stake in the increased post-bid returns. Helpful tools in this respect are exchange offers where shares of the bidding company are offered in consideration for the shares of the target. From the point of view of the target shareholders, mergers partially replicate the dynamics of exchange offers.43 In particular, shareholders of the transferring company receive shares of the acquiring company as a replacement for the shares they held. Cross-border mergers are not particularly prone to intense free-riding by shareholders fearing not to partake in the future benefits of the new management. However, they are not immune to other, more extreme, free-riding issues under the form of a hold-up by shareholders that want to extract rents from their ability to block the transactions. Historically, mergers often required unanimous shareholder consent, but the requirement was subsequently lowered down to a qualified majority in most jurisdictions so as to prevent reluctant residual shareholders from vetoing transactions. As Article 93 Directive (EU) 2017/1132 establishes minimum supermajority requirements only for national mergers, member states may theoretically set higher approval thresholds for cross-bored mergers and leverage on free-riding dynamics to make those business combinations more difficult. However, scholars believe that anti-discrimination principles prevent this kind of differentiation (Grundmann 2012, p. 706), so that the majority requirement adopted under Article 93 for purely national mergers might represent not only a floor, but also a cap for the majority required to approve cross-border mergers under Article 126 Directive (EU) 2017/1132.

2.4

Voluntary and Forced Exit

One last feature this chapter focuses on is shareholder exit. (Cross-border) mergers and (cross-border) takeovers rely to different extents on exit with a view to striking a delicate balance in protecting investors. The previous analysis of collective action problems provides a good explanation of the reasons why EU—and to a greater extent national—law makes recourse to voluntary or forced exit of reluctant minorities. Let us first consider mandatory exit, and squeeze-out in particular. Squeeze-outs may be efficient because they reduce the risk of retaliation by holdouts and limit free-riding problems, thus facilitating business combinations (Johnston 2009, p. 48). Too permissive a regime for freeze-outs would however deprive

43 This analogy also justifies an equivalent tax treatment when such reorganizations are performed on a cross-border basis (Arts 2(1)(e) and 8 Directive 2009/133/EC).

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minorities of adequate protection of their ownership rights. This would result in both a limitation of a fundamental right44 and in reduced ex-ante incentives to invest. For mergers, the voting mechanism based on supermajority approval, as opposed to unanimity, reduces hold-up problems and forces reluctant minorities to have their shares replaced or diluted at the outcome of the reorganization. Therefore, the need for a specific squeeze-out rule is not as pressing as in other contexts, because mergers enable controlling shareholders to freeze-outs minorities for shares. The law of some member states goes even further and enables shareholders controlling all but a fraction of the company’s capital to cash-out residual minorities with no previous tender offer, a result that would be more difficult to obtain through more traditional techniques such as increasing the exchange ratio within a merger or performing a reverse stock split. An oft-mentioned example is a German rule that allows to cash out minorities below 5% on the basis of a general meeting decision and at a price determined by a court-appointed expert (§ 327a–f AktG: Ventoruzzo 2010, pp. 901–902; Kraakman et al. 2017, pp. 190–191 and 230). These national provisions also enable member states to deviate from the rules applicable to crossborder mergers where the acquiring company holds 90% or more of the shares of the transferring company (Article 114(2) Directive (EU) 2017/1132). The takeover bid directive sets forth the most effective EU-wide cash-out rule, namely the right to squeeze-out minorities. The directive grants this right to the offeror that has secured at least 90% of the voting capital and of the votes, following a bid made to all the holders of the offeree company’s securities for all of their securities. The relevant threshold may refer to either the offeree’s shareholding in absolute terms or to the number of shares tendered in the context of the offer, at the choice of the member state. More precisely, the squeeze-out right applies either where the offeror holds securities representing at least 90% of the voting capital and 90% of the voting rights (member states may raise the percentage to 95%) or where, following acceptance of the bid, the offeror has acquired 90% of the voting capital and 90% of the voting rights comprised in the bid (Article 15 Directive 2004/25/EC). Being based on the acceptance rate, this last parameter defines in any case what constitutes the “fair price” for a squeeze-out following a voluntary offer, while consideration offered in a mandatory bid shall always be presumed to be fair. In other circumstances, the determination of the fair price relies on national rules and supervisory practices. Once the offeror has crossed the 90% threshold, there are therefore two ways to freeze minorities out under EU law. The first one is through a (cross-border) merger enjoying a simplified procedure (Article 132(2) Directive (EU) 2017/1132), and the second one is by enforcing the squeeze-out right under takeover law. However, the entity of the simplifications for cross-border mergers depends on national choices, 44

The case law of the European Court of Human Rights admits restrictions to ownership rights concerning company shares due to squeeze-out procedures when the applicable law ensures fair compensation (ECtHR, Offerhaus and Offerhaus v. the Netherlands, App. No 35730/97, 16 January 2001; European Commission of Human Rights, Bramelid and Malmström v. Sweden, App. No 8588/79 and 8589/79, 12 December 1983).

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and the determination of the squeeze-out price under Directive 2004/25/EU is harmonised only in some circumstances. Therefore, guessing in abstract terms which alternative leads to the best outcome in terms of investor protection, or is more convenient in fostering cross-border reorganizations, is a difficult exercise. In general, scholars highlight that mergers normally have higher procedural costs, but often ensure lower returns for minority shareholders (Papadopoulos 2007, p. 530). National rules can offer further tools to reach a substantial squeeze-out. For instance, UK company law enables legal devices (falling into the broad category of the schemes of arrangement45) whereby shareholders of the target company have their shares replaced with those of the acquiring company (Davies 2008, pp. 977–978). This outcome closely mirrors that of an exchange offer, with the crucial difference that the general meeting, as opposed to shareholders individually, has the competence to decide on the scheme. Consequently, these forms of reorganization can squeeze-out minorities in the target even when less than 90% of the addressee shareholders accept, through their vote, the scheme (normally, 75% is the applicable threshold; Kershaw 2016, §§ 2.35 and 2.55; courts have sometimes been reluctant to uphold schemes not approved by the majority of the non-affiliated minority, however: Ventoruzzo 2010, p. 901). Reverse triangular mergers, which some authors deem subject to the EU framework on cross-border mergers, may lead to a comparable outcome.46 Voluntary exit raises issues that are symmetrical to those of mandatory exit. In general, allowing disagreeing minorities to leave the company once a major control change has occurred has the potential benefit of curbing the incumbents’ incentives to exploit collective decision-making rules to the detriment of outside investors. Ex-ante, this enhanced protection incentivises investments by providing a—sometimes limited—safeguard against major adverse control changes. While this first rationale of voluntary exit extends to both mergers and takeovers, a second explanation refers to collective action problems that affect takeovers to a much larger extent. In particular, voluntary exit may reduce the pressure to tender, because investors may follow a wait-and-see strategy in the first place, while being allowed to quit when the outcome of the takeover becomes clear. As the decision to leave the company may be postponed, shareholders are not forced to facilitate undesired control changes. Of course, each of these effects has a flipside. Providing dissenting shareholder with a put option may become as expensive as to prevent the feasibility of valueincreasing transactions, and extending the offering period may increase free-riding problems. The EU law on cross-border mergers therefore does not afford dissenting shareholders appraisal rights (Grundmann 2012, p. 685), but it leaves member states the option to do so (under the general provision that national law can adopt rules designed to ensure appropriate protection for minority members who have opposed the cross-border merger: Article 121(2) Directive (EU) 2017/1132). Many EU

45 46

See Sect. 1.1 above. See Sect. 1.1 above.

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countries do not, therefore, rely on appraisal rights, although some major jurisdictions—including Germany, France, and Italy—grant them at least for some mergers (Kraakman et al. 2017, pp. 186–187).47 At the EU level, an exit option that enables minorities to cash their investment out only exists in the context of takeovers. When a control change occurs, or a previously widely-held company becomes a controlled entity,48 the mandatory bid rule grants shareholders the possibility of tendering their shares at a price that is in principle able to capture at least part of the expected future returns of the new controlling shareholder—whether these will come from efficiency gains or increased private benefits of control (Article 5 Directive 2004/24/EC). As the mandatory bid rule often leads to very expensive offers, takeovers and mergers may have a different appeal depending on their capacity to escape that duty, thereby avoiding the need to pay an exit to dissenting shareholders. EU law directly grants an exemption from the mandatory bid rule when the control threshold is crossed following a voluntary bid to all the holders of securities for all their holdings (Article 5(2) Directive 2004/25/EC). Other exemptions are possible under national laws, however (Article 4(5) Directive 2004/25/EC), and these normally concern mergers as well (European Commission 2012, pp. 6–7; Ventoruzzo et al. 2015, p. 532). The contents of such exemptions for mergers and other reorganizations are not harmonised across the EU,49 so that their capacity to make those transactions more attractive than a voluntary bid on all the outstanding capital varies from country to country. More importantly, this leaves cross-border reorganizations subject to regulatory arbitrage, as the involved companies may structure their reorganization by trying to take advantage of more lenient regimes.50 Besides mandating a bid for control changes, EU takeover law grants minorities the right to sell-out their shares to the offeror who has acquired at least 90% of the 47 Differential treatment of cross-border, as opposed to local, mergers may be justified because of the change in the applicable company law (Kurtulan 2017). 48 The EU law leaves the definition of the control threshold to member states’ discretion. Most EU jurisdictions set it at 30% (European Commission 2012, p. 5). 49 For instance, in Italy, shareholders crossing the control threshold through mergers are not under an obligation to launch a mandatory bid provided that the merger is approved by a majority of the disinterested shareholders of the target (Art. 49(1)(g) Consob Reg. No 11971 of 1999), while contributions in kind are exempted only when the capital increase would restore the company’s compromised financial conditions (Art. 49(1)(b)). In France, the AMF may grant a waiver from the mandatory bid rule for both mergers and contributions in kind subject to shareholder approval (Art. 234-9 AMF General Regulation). 50 Take for instance company A controlling the listed company B in country X, and company C controlling the listed company D in country Y. Imagine company B and company D want to combine their businesses. Country X exempts contributions in kind, while country Y does not (see fn 49 for a practical example). Assuming that the contribution to B or D of shares giving control over D or B respectively would cross the mandatory bid threshold in both companies, A and C will have an incentive to organize the transaction so that C contributes to B its controlling stake in D. In this case, the only duty will be for B to launch a bid on D. If A contributed to D its controlling stake in B, then A would be forced to launch a bid on D, and D would have to do the same on B, thus making the whole transaction more expensive.

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voting shares (Article 16 Directive 2004/25/EC).51 This enables small residual minorities to leave the company at a fair price when their ability to prevent potentially abusive behaviour by the controlling shareholder is impaired. On top of the EU rule on sell-out, many member states also mandate an extension of the acceptance period (or a reopening of the offer) when the offeror reaches some thresholds that ensure tighter control—such as the absolute majority of voting rights or a majority sufficient to pass charter amendments52—or when the offer is no longer subject to conditions based on minimum acceptance rates53 (either because those conditions are met or because the offer is declared unconditional as to acceptances).54

3 Conclusions This chapter has compared the EU legal regimes for cross-border mergers and crossborder takeovers from a functional point of view. Both legal frameworks deal with similar agency problems concerning the need to ensure investor protection from value-decreasing reorganizations and, at the same time, to facilitate efficient financial transactions. Unfortunately, the two regulatory objectives easily lead to an obvious trade-off. Particularly protective measures may prevent the expropriation of minorities, but they may also discourage potentially efficient reorganizations by making those transactions too expensive. Too lax a regime may instead avoid the risk that holdouts block transactions that would have benefited all the remaining shareholders, but may also allow cash-outs to the detriment of minority shareholders. This scenario reflects the typical double-edged nature of many protective measures, a problem that cross-border takeovers and cross-border mergers address with different techniques. For instance, the mandatory bid rule may discourage value-decreasing control changes by reducing, potentially down to zero, the incentives to take over companies with a view to extracting private benefits of control. However, it can also make efficient control changes more expensive, because it forces the bidder to share the expected benefits of her superior managerial ability with the tendering shareholders. For this reason, the mandatory bid rule is also considered a defensive measure under certain circumstances (Ventoruzzo 2008). By the same token, restriction to freezeouts, while protecting minority shareholders from potential expropriations, can also shield shareholders holding de facto control from hostile acquisitions (Ventoruzzo

51

The threshold is defined by reference to the squeeze-out rule. These thresholds are normally lower than those applicable to squeeze-out rights, and are therefore particularly protective for minority shareholders (Kraakman et al. 2017, p. 230). 53 Conditional offers are particularly prone to pressure to tender: see text following fn 38 above. 54 Similar rules exist for instance, sometimes with additional qualifications, in Germany, UK, France, Italy and Austria (Grundmann 2012, p. 737; Kraakman et al. 2017, p. 230). 52

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2010, pp. 910–911). A similar reasoning applies to (cross-border) mergers as well, as the divergent national approaches to appraisal rights demonstrate. All in all, neither the capacity to block nor the ability to foster reorganizations has a bijective correspondence with shareholder protection. The crucial element is, in all circumstances, the allocation of the power to decide whether to pursue that reorganization, together with the relative efficiency of the governance devices regulating such power.

References Armour J, Ringe W-G (2011) European Company Law 1999–2010: renaissance and crisis. Common Mark Law Rev 48:125–174 Bebchuk L (1985) Toward undistorted choice and equal treatment in corporate takeovers. Harv Law Rev 98:1695–1808 Bebchuk L (1987) The pressure to tender: an analysis and a proposed remedy. Del J Corp Law 12:911–949 Bech-Bruun and Lexidale (2013) Study on the application of the cross-border mergers directive. Brussels CESR (2003) Summary of the answers to the questionnaire on the way Member States interpret the notion of equivalence in the context described in Article 4(3) of the Prospectus Directive (CESR/03-495) Clerc C et al (2012) A legal and economic assessment of European takeover regulation. CEPS, Brussels Coase RH (1937) The nature of the firm. Economica 4:386–405 Coffee J (1988) The uncertain case for takeover reform: an essay on stockholders, stakeholders and bust-ups. Wis Law Rev: 435–465 Davies P (2008) Gower and Davies’ principles of modern company law. Sweet & Maxwell, London ECJ, Case C-167/01, Inspire Art, 30 September 2003, ECLI:EU:C:2003:512 ECJ, Case C-2/74, Reyners, 21 June 1974, ECLI:EU:C:1974:68 ECJ, Case C-208/00, Überseering., 5 November 2002, ECLI:EU:C:2002:632 ECJ, Case C-212/97, Centros, 9 March 1999, ECLI:EU:C:1999:126 ECJ, Case C-411/03, SEVIC, 13 December 2005, ECLI:EU:C:2005:762 Enriques L (2004) The mandatory bid rule in the takeover directive: harmonization without foundation. Eur Company Financ Law Rev 1:440–457 Enriques L (2011) European takeover law: the case for a neutral approach. Eur Bus Law Rev 22:623–639 Enriques L, Gatti M (2015) Creeping acquisitions in Europe: enabling companies to be better safe than sorry. J Corp Law Stud 15:55–101 ESMA, Questions and answers. Prospectuses. 27th updated version – October 2017 (ESMA-31-62780) European Commission (2012) Report on the Application of Directive 2004/25/EC on takeover bids (COM(2012) 347 final) Gerner-Beuerle C, Kershaw D, Solinas M (2011) Is the board neutrality rule trivial? Amnesia about corporate law in European takeover regulation. Eur Bus Law Rev 22:559–622 Gilson R (1992) The political ecology of takeovers: thoughts on harmonizing the European corporate governance environment. Fordham Law Rev 61:161–192 Gilson R, Gordon J (2003) Controlling controlling shareholders. Univ Pa Law Rev 152:785–843 Grossman S, Hart O (1986) The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 94:691–719

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Matteo Gargantini is Assistant Professor of European Economic Law at the University of Utrecht. Previously, Matteo worked at Consob, the Italian Securities and Exchange Commission, and at the Max Planck Institute Luxembourg for Procedural Law (as a Senior Research Fellow). He also worked in the Capital Markets and Listed Companies Unit of Assonime, the Association of the Italian joint-stock companies. Matteo holds a PhD in Law and Economics (Banking and Financial Markets Law) from the University of Siena, and in 2012 he received the Italian National Academic Qualification as Associate Professor (Law and Economics and Financial Markets Law). His main fields of research are capital markets, banking, and company law.

The Relationship Between Article 4(1)(b) of the Cross-Border Merger Directive and the European Merger Regulation Marco Corradi and Julian Nowag

1 Introduction The European Union Cross-Border Merger Directive (CBMD)1 aims at facilitating ‘the cross-border merger of limited liability companies.’2 Cross-border mergers may be more difficult than purely national ones for a number of reasons. The cross-border element entails a significant increase in transaction costs. Such transaction costs may derive from diversity in legal, linguistic and cultural variables. Crossing borders means not only having to deal with different legal systems, different languages and different legal and business cultures. It also means dealing with different national political systems that may show fragmentation and divergence from an EU perspective. State measures directed to block mergers might be an expression of such political attitude. Therefore, although marginal in the average merger assessment, a state’s opposition to a merger on grounds of public interest may be particularly likely to occur in a cross-border merger contexts. As a matter of fact, companies are crucial assets for a state’s economy. This is true from at least two different perspectives, one of which is internal to the state whereas the other one is international:

1

Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies [2005] OJ L310/1. 2 Considerandum n (1) para 9. M. Corradi (*) Stockholm Centre for Commercial Law and Stockholm University, Stockholm, Sweden Oxford University Institute for European and Comparative Law, Oxford, UK J. Nowag Lund University, Lund, Sweden Oxford University Centre for Competition Law and Policy, Oxford, UK e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_8

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From an internal perspective, corporations contribute to a state’s treasury through corporate taxation. Moreover, corporations are often connected to a series of interests associated to a large number of stakeholders, such as creditors, employees, consumers—but also to ordinary citizens. While the citizens may not be involved directly with any specific corporation, they may be affected by negative externalities deriving from corporate action, such as for instance pollution or job losses because of a merger. Hence, it is not surprising that a state wants to exercise a degree of control over the acquisition of corporations by foreign players. From an international perspective, some corporations may be perceived as national champions, i.e. entities that actively promote the interest of the nation, well beyond their private sphere of action. Such conception can be intended in many ways. One may be political, that is a state may be interested in protecting interests related to strategic sectors such as defense. Another may be related to politics of economic dominance, which nowadays may intersect also non-economics spheres, such as in the case of the IT giants which have access to users’ personal data well beyond the state where they are incorporated.3 Strengthening a national player may also be perceived as furthering competition on an international plan, especially where the playing field is not levelled, for examples due to public subsidies to industry.4 While EU State Aid policy may be considered as an essential tool for the purpose of furthering competition within the EU’s internal market, it may also be criticized, because it may provide an advantage for non-EU corporations which can receive State aid within their home state. The implications of the public interest defenses raised by a state whose corporations are involved in a merger are extremely complex and go well beyond the legal analysis of the provision in the CBMD and the scope of this Chapter. Nonetheless, there is a leitmotiv to be kept in mind. There is an inherent tension between the protection of ‘valid’ (national) public interests by EU member states and cases where such interests are employed to camouflage protectionist interventions within the EU internal market. Such action favors some companies and may provide a short term electoral gain but may end up damaging citizens, as well as the competitive process as a whole, in the medium and long term. The risk presented by protectionist intervention in the merger process and the divergence in approaches to the opposition to mergers based on public interest grounds is addressed in Article 4(2)(b) of the CBMD. That provision makes reference to the European Merger Regulation (EUMR)6 and declares that Article 4(2)(b) is not applicable where the merger is covered by the EUMR. From a practical perspective, the legal assessment of a

3

See for example the debate surrounding access to emails stored by Microsoft but within a different jurisdiction, Nakashima (2018). 4 See for example the Commission decision in Siemens/Alstom (6 February 2019) Commission Press release IP/19/881 http://europa.eu/rapid/press-release_IP-19-881_en.htm (accessed 04.03.2019), where one of the arguments made were the subsidies given to Chinese train companies. 6 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings [2004] OJ L 24/1.

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merger represents a major concern for the companies intending to merge ex ante, because of merger law’s potential to prevent the merger. Besides Article 4(1)(b), the CBMD mentions competition law only in its consideranda, stating that the directive ‘is without prejudice to the application of the legislation on the control of concentrations between undertakings, both at Community level, by Regulation (EC) No 139/2004 (1), and at the level of Member States.’7 Thus, competition law could be conceived as another legal order which can introduce further obstacles for companies that intend to merge. However, in this Chapter we show that at least the EUMR might also have the reverse effect. It provides companies with a shield against the Member States attempting to prevent a merger based on public interest grounds. We also claim that the situation is remarkably different when a merger is assessed under national merger laws. In the following Sections, we will first highlight a number of national rules of the EU member states with regard to the opposition of a merger for reasons of public interest. This shows the substantive divergences that still exist in this non-harmonized area of the law. Second, we will delve into the interpretation of CBMD Article 4(2)(b), explaining its substantive and procedural meaning in limiting such governmental action. Third, we will compare the protection offered by the CBMD against the protection available under the EUMR. In the fourth Section, we will conclude showing that the benefits of the EUMR are only available in a limited number of cases and that the majority of cross-border mergers between small and medium sizes companies do not necessarily receive this special protection. Moreover, we show that even the protection embedded in the CBMD is only relevant for a very small number of cases.

2 National Merger Rules on Public Interest and Article 4 (1)(b) CBMD In this Section, we provide an overview of selected jurisdictions. We show how they provide for the consideration for public interests in mergers. The aim of this Section is to highlight the divergence in EU member states’ approach to this issue. We also provide a short account of the development of such doctrine within the UK. Although leaving the EU, the UK is a good example of the evolution of a state’s policy towards cross-border mergers: from an approach taking carefully into consideration national interests to one almost entirely based on open markets.8 We believe that the development of such policy within the UK may offer a chance to reflect on this difficult subject matter, also given that UK academics and politicians

7 8

Considerandum n. 9. See this Section, text to (n 29ff).

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have always influenced the EU competition law making with their liberal tradition, so crucial for the creation of the Internal Market.9 A recent paper on public interest within domestic merger control has provided an overview of this subject matter on a global scale.10 It has highlighted the diversity in the institutional mechanisms employed for considering public interests within a domestic merger procedure. Such diversity in institutional mergers would emerge also in the context of a cross-border merger, as stated in CBMD Article 4(1)(b). Such an approach does not fit within the usual competition framework, so that a state can either balance public interest against competition as part of the substantive test for mergers or regulate public interest as an exception to the ordinary merger assessment.11 Often states also have sectorial regulations and procedures for certain industries to ensure the public interest is protected in mergers, for instance in banking, transports or defence.12 Merger procedures and rules on the substantive assessment of a merger do not only differ substantially across the globe. Even within the European Union, such differences are remarkable across member states. In a recent OECD round table on public interest in merger control, only a few EU member states have submitted their observations, which provide summary descriptions of their way of assessing public interest within national merger procedure. From this limited sample of EU member states, a clear trend towards restricting governmental intervention in merger procedure in defence on public interest can be observed. Nonetheless, national legislations still display a diversity in the ways in which public interest considerations may become part of a merger assessment.13 The Netherlands represents the most liberal approach in the EU with regard to the public interest defence in national merger procedure. Under the procedure set by Section 47 of the Dutch Competition Act (DCA), the Dutch Ministry of Economic Affairs is authorised to intervene within a national merger procedure only to positively influence the decision of the ACM.14 This may not be of great interest in the context of a cross-border merger, unless these pro-merger derogations are applied in a discriminatory manner,15 that is to say if the Netherlands granted such exceptions more easily to Dutch companies or in a national context as compared to a

9

Monti (2017). Reader (2018). 11 Ibidem. 12 Ibidem. 13 On the Roundtable see the documents produced in occasion of Session III at the 123rd meeting of the OECD Working Party No. 3 on Co-operation and Enforcement on 14–15 June 2016. See in particular a background paper by the Secretariat on Public Interest Considerations in Merger Control, 30th of June 2016, DAF/COMP/WP3(2016)3. 14 DCA Article 47 (1) states the following. ‘After the Board has refused a license for the implementation of a concentration and following an application requesting such, Our Minister may decide that the license shall be granted if, in the Minister’s opinion, this is necessary for important reasons in the public interest, which outweigh the expected impediment to competition.’ 15 Hilson (1999). 10

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cross-border one. Such discriminatory action may reflect negatively especially on takeover plans, where a foreign offeror could be dissuaded from launching a takeover if the Dutch government had systematically denied pro-merger interventions in favour of cross-border mergers. Regardless of the effect on cross-border mergers, the authorization of anticompetitive mergers on grounds of public interest has raised political criticisms in the Netherlands, especially in relation to the clearance of mergers taking place in the area of public health care.16 The justification advanced by the Dutch government for clearing this kind of merger was increasing countervailing buyer power.17 However, retrospectively there seem to be no real improvements in terms of efficiency nor prices.18 While the Dutch government can allow an otherwise anticompetitive merger, it is not authorised to interfere within a national merger procedure for preventing a merger from taking place.19 Hence, from this perspective, the Netherlands seem to be embracing a very liberal approach, which contrast for example with the one adopted by Germany. In Germany, similarly to the Netherlands, a system to authorise20 otherwise anticompetitive mergers based on public interest grounds exists.21 However, Germany also has a system in place that can be used to oppose a cross-border merger on grounds of public interest. Two procedures can be distinguished in this regard. The general procedure22 under which, according to Section 4 of the Foreign Trade and Payments Act, a ministerial decree can make any kind of transactions with foreign countries subject to an authorisation system based on public interest grounds. As Sec 5(3) highlights, such restriction can be imposed in particular in cases of acquisition of equity in German companies that are relevant for national security. However, the system23 also allows for individual decisions24 to protect the public interest.

16 https://www.acm.nl/en/publications/publication/17614/ACM-clears-merger-between-twoDutch-hospitals-in-Amsterdam, last access at 17-03-2018. https://www. competitionpolicyinternational.com/wp-content/uploads/2017/07/CPI-Varkevisser-Schut.pdf, last access at 17-03-2018. Criticism have been raised for the absence of improvement in the quality of healthcare. See https://www.competitionpolicyinternational.com/wp-content/uploads/2017/07/ CPI-Broers-Kemp.pdf, last access at 17-03-2018. 17 Kemp et al. (2012). 18 Ibidem. 19 Public Interest Considerations in Merger Control, Note by the Netherlands, 03-06-2016, DAF/COMP/WP3/WD(2016)6, at 2, points 4 ff. 20 Sec. 36 § 1 of the Gesetz gegen Wettbewerbsbeschränkungen (German Anti-Competition Act) applies a pure SIEC (significantly impedes effective competition) criterion. 21 Public Interest Considerations in Merger Control, Note by Germany, 10-06-2016 DAF/COMP/ WP3/WD(2016)3, 2 ff. 22 Außenwirtschaftsgesetz—AWG (Foreign Trade and Payments Act) of 6 June 2013 (Federal Law Gazette [BGBl.] Part I p. 1482). 23 Sec 6 of the AWG. 24 Rather than general ministerial decrees subjecting whole industries to an authorization system.

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Moreover, acquisitions in certain industrial sectors, such as armaments or IT security, are already subject to special procedures.25 Therefore, it can be said that the German government has a degree of discretion in intervening for the protection of (national) public interests within national cross-border merger procedures. Our brief comparison of the essential features of the procedures for the defence of public interests in German and Dutch national merger procedures shows that there still is quite a degree of difference, even in two EU member states with closely related legal traditions.26 Such raise concerns from a policy perspective. To put this in the words of the OECD secretariat, the way public interest considerations are set forth in the law has practical consequences and that, in order to protect legal certainty, public interest considerations should be clearly spelt out in law or soft law. As it is difficult to balance competition and public interest criteria guidance would help authorities to interpret and apply public interest considerations in an objective, transparent and predictable manner.27

Regardless of the state of the art within each EU member state, it is worth noting that member states may still go through phases of relative openness or closeness towards cross-border equity acquisitions and cross-border mergers, as long as there is no common EU framework. For instance, in 2006 there has been a strong waive of protectionism in the EU, by states such as France, Italy, Poland and Spain.28 A good example in this respect is offered by the UK. British competition law dates back to the Middle Ages.29 It was only after the 1929 crisis that the British Empire introduced legislation such as the 1932 Import Duties Act, which produced cartelisation of several sectors of its economy.30 Already in the mid-1940s, a reintroduction of the competition principle in the British Empire industrial system can be observed. The Monopolies and Restrictive Practices (Inquiry and Control) Act (MRPA) 1948 was constructed around a rather flexible but also uncertain criterion of public interest. Such a formulation provided the Monopolies and Restrictive Practices Commission—under the direction of the Secretary of State—with a highly discretionary power.31 Unsurprisingly, it was strongly opposed by business leaders.32

25

For more details see Public Interest Considerations in Merger Control, Note by Germany (n 12) par 26 ff. 26 For an overview on the difference see Lexidale, Study on the Application of the Cross-Border Merger Directive, September 2013. 27 Public Interest Considerations in Merger Control, Background Paper by the Secretariat, DAF/COMP/WP3(2016)3, Par 65. 28 Galloway (2007) p. 2 ff. 29 John Dyer’s Case, Y.B. 2 Hen. 5, fo. 5, pl. 26 (C.P. 1414). See in detail Hawk (2018). Another important area for the development of competition law was Italy. Medieval Italy is one of the oldest European example. See Corradi (2018). However, England stuck faithfully to its competition tradition without interruption until the twentieth century. 30 Wise (2004). 31 Scott (2009). 32 Ibidem.

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The Fair Trading Act 1973, Section 84 cited several criteria to be taken into account when assessing a merger, such as for instance ‘maintaining and promoting the balanced distribution of industry and employment in the United Kingdom’ (as in s 84 (d)). Although some of those criteria were external to the competition one and potentially in opposition to it, the Act was progressively interpreted in a pro-competitive way. A strong stance in favor of a clear pro-competition approach was taken by Lord Tebbit during his time as Secretary of State, in 1984.33 When appointed as Secretary of State for Trade and Industry, Lord Lilley reversed at least on paper Lord Tebbit’s approach. He strongly supported the idea of applying a public interest test to crossborder mergers, for countering attempts by foreign state-owned companies to take over British companies. He referred to these attempts as ‘nationalization by the back door’.34 The Lilley doctrine did not receive a particularly intense application,35 and the victory of a strong competition-oriented approach is very clear in the UK Enterprise Act 2002 (UKEA 2002). UKEA 2002 Chapter 2 is devoted to ‘public interest cases’. It contains several detailed provisions which seems to restrict, through a heavily regulated procedure, the discretion of the Secretary of State when intervening in a national merger procedure on public interest grounds.36 On the verge of Brexit, the UK seems to show renewed interest for the protection of national economic interests. In a governmental press release, it has been clarified that after the Hinkley Point C nuclear plan merger clearance, the UK Government has purported to introduce an approach ‘considering the national security implications of all significant investments in critical infrastructure, including nuclear energy, in the future.’37 It becomes clear that even in a well-rooted pro-competition tradition there are options or trends towards allowing the Government to oppose mergers on public interest grounds even where no competition concerns exist. Given these options to limit cross-border mergers based on public interest grounds, one might ask what options EU law provides to defend against protectionist measures. One of these tools is Article 4(1)(b) of the CBMD. According to that Article, the merging parties ‘shall comply with the provisions and formalities of the national law to which it is subject’ including those that provide for the opposition to a given internal merger based on public interest grounds as well as the EUMR. Thus, member states are allowed to object to mergers based on public interest grounds. Yet, this Article seems to contain also a non-discrimination clause because it allows only the application of those rules that would apply to ‘a given internal

33

Kryda (2002). Department for Trade and Industry press notice 90/457, Merger reference policy, 26 July 1990. 35 Kryda (2002). 36 UK Enterprise Act 2002, https://www.legislation.gov.uk/ukpga/2002/40/contents, last access 29-03-2018. 37 https://www.gov.uk/government/news/government-confirms-hinkley-point-c-project-followingnew-agreement-in-principle-with-edf, last access 19-03-2018. 34

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merger.’ Thus, Article 4(1)(b) prevents the application of rules that apply discriminatorily, in particular rules that are designed to apply only to cross-border mergers. While this clarification regarding discrimination might be welcomed, it is unlikely that EU member states adopt procedures for the assessment of public interest which apply only to cases of cross-border mergers, that is to say rules that are discriminatory de jure. It is much more likely that the procedure at stake is applied in a discriminatory way de facto, which is harder to prove.38 While Article 4(1)(b) is helpful in prohibiting de jure discrimination, it might also be misleading. The Article leaves out that EU law does also prohibit de facto discrimination and other measures that might make cross-border mergers more difficult. Of relevance is in this regard in particular Gebhard39 which that provides that every measure that makes the exercise of the freedom of establishment less attractive needs to be justified by imperative requirements in the general interest and must be proportional.40 Thus, Member States might use some of their domestic rules to object to cross-border mergers subject however to the non/discrimination provision contained in Article 4(1)(b) and the general compliance with the freedoms and the relevant principle of proportionality. However, it is important to bear in mind that it is up to the company to challenge any measure that hinders its cross-border mergers before national courts, where the relevant authorities might then defend their action.

3 The Role of the EUMR in Protecting Mergers Against Public Interest Oppositions The CMBR and the free-movement rules provide some protection to merging parties against the invocation of public interest against a merger. Yet active engagement by the parties is required to invoke these defences. The parties would have to pursue a court case against the Government’s decision blocking the merger. This requirement to take legal action alone has a chilling effect. This effect might be even greater taking into account that not all courts in Member States readily apply EU law.41 While in these cases the merging parties would need to bring court cases to defend themselves against the Government, the EUMR offers a different system of

38 It may be possible to identify and punish discriminatory approaches in a takeover context, where for instance there may be competing offers, in case a cross-border offer is antagonized by the state of the target whereas national offers are facilitated. Yet, in a pure merger context after the takeover this would more difficult. 39 C-55/94, Reinhard Gebhard v. Consiglio dell’Ordine degli Avvocati e Procuratori di Milano, [1995] ECLI I-4186, para 37. 40 Ibid. 41 See for example with regard to the requirement to request a preliminary reference Fenger and Broberg (2011), pp. 180–212.

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protection. This system provides the parties with an ex ante system where public interests claims are scrutinised by the EU Commission. This system is a consequence of Article 21(2) of the EUMR that allocates the ‘sole jurisdiction’ to the EU Commission to review the compatibility of concentrations of an EU dimension based on competition ground.42 While, the ex ante system allows the Member States to protect public interests that are not protected by the EUMR itself43 it sets out conditions for instances. Article 21(4) EUMR distinguishes between two different types of public interest: privileged and non-privileged interests. In general, all objections against mergers based on public interests need to be notified to the Commission. From this general rule an exception exists for privileged public interest, namely media plurality,44 public security,45 and prudential rules.46 The invocation of these interests to block a merger is permissible without ex ante notification. However, even such privileged public interest are only exempted where the measure genuinely aims at such an interest and complies with the non-discrimination and proportionality principles. Thus, the EU Commission in Secil/Holderbank/Cimpor47 decided that the Portuguese Minister of Finance’s decision aiming to block the merger between Secil and Holderbank with the cement company Cimpor should have been notified and was contrary to EU law. In particular, prudential rules were not at stake because the parties were neither active in banking nor the provision of insurance services. The disciplining force of Article 24 can also be seen in BBVA/BNL and ABN AMRO/Banca Antonveneta,48 where the Bank of Italy refused to authorise the take-over of Italian banks by reference to ‘national consolidation’ of the banking sector. After a mere warning about a violation of Article 21 EUMR by the European Commission, the Bank of Italy abandoned its opposition. This ex ante system changes the power play between the merging parties and the State substantively. The State is required to justify its attempt to block a merger on 42

On the current state and the future of public policy consideration within the Commission’s appraisal of mergers see Reader (2017), pp. 1–12. 43 Jones and Sufrin (2014), p. 1164. 44 See for example the European Commission Decision of 21/12/2010 in Case COMP/5932—News Corp/BSKYB which was cleared by the Commission but then blocked by the UK based on reason of media plurality. 45 Public security is interpreted narrowly concentration in relation to arms trade or production or to security of supplies such as the security of energy supply to the extent that they are necessary to ensure a minimum level of energy supplies in the event of a crisis, see e.g. Case 72/83 Campus Oil v Minister for Industry and Energy [1984] ECR 2727. See also with regard to energy and water supply European Commission Decision of 29/03/1995, Water Industry Act; European Commission Decision of 21/12/1995 in Case COMP/M.567—Lyonnaise Des Eaux/Northumbrian Water; European Commission Decision of 27/01/1999 in Case COMP/1346—EdF/London Electricity. 46 Such as for example rules related to banking, finance and the insurance sector and are often designed to ensure financial stability and adequacy, see Which and Bailey (2015), p. 896. 47 European Commission Decision of 11/01/2000 in Case COMP/M.2054. 48 See Cases M.3768 and case M.3780.

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public interest grounds in front of an independent body. Moreover, where a Member State does not comply with the notification requirement, the Commission could open an infringement procedure pursuant to Article 258 TFEU49 or issue a decision declaring the Member States’ choice to block the merger to be contrary to Article 21 of the EUMR and even order the withdrawal of the relevant legal measure. In practice, such withdrawal decisions are more frequently used than infringement procedures as they provide a more direct remedy for the merging parties. For example, in Abertis/Autostrade50 Italy sought to prevent the acquisition of Autostrade—which manages Italian motorways—by the Spanish Abertis group. The Italian State feared that Abertis would not invest enough into Italian motorways. The Commission decided that this measure had not been notified and was incompatible with EU law, thereby ensuring the merger would not be blocked by Italy for these reasons. Substantively, the Commission under Article 21 EUMR assesses in particular the non-discrimination principle and ensures compliance with free-movement of capital and the freedom of establishment, that is to say Article 69 and 49 TFEU. In this regard, it is important to note that these provisions do not only capture discriminatory rules but go beyond discrimination by banning all measures that ‘prohibit, impede or render less attractive’51 cross-border establishment of the movement of capital. The examination of these principles can for example be observed in E.ON/ Endesa52 or in Enel/Acciona/Endesa.53 In E.ON/Endesa, the Commission found that the state measure would dissuade investors by impeding the acquisition of shares in the undertakings thereby restricting free-movement of capital. In Enel/Acciona/ Endesa, the Commission found that (a) the requirement to maintain the registered office and the decision-making bodies of Endesa in Spain, and (b) the requirement to use domestic coal and to refrain from divesting Endesa’s assets outside the Spanish for at least 5 years were contrary to the freedom of establishment. Thus, the Commission prohibited these conditions for the merger. It thus becomes clear that the EUMR provides a rather effective system to protect the parties involved in a merger against member states that aim to prevent the merger and claim to do so in the public interest.

49 See European Commission Decisions of 20/12/2006 and 26/09/2006 in Case COMP/M.4197—E. ON /Endesa. 50 Case M.4249. 51 See e.g. Case C-168/91 Konstantinidis [1993] ECR I-1198 with regard to establishment or Case C–98/01 Commission v UK [2003] ECR I- 4641 para. 20 with regard to capital. 52 European Commission Decisions of 20/12/2006 and 26/09/2006 in Case COMP/M.4197—E.ON /Endesa. 53 European Commission Decision of 11/09/2007 in Case COMP/M.4685—Enel/Acciona/Endesa.

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4 The Difference in Scope and The Limits of Protection Having explored the protection offered under the EUMR, in this section we explore the extent to which this protection is available in cross-border merger situations. We then highlight the broader scope of the CBMD. Finally, we show that even though the scope of the CBMD is broader than that of the EUMR, the protection offered under the CBMD is often of limited use in practice. The EUMR’s introduces a one-stop-shop and limitations on public interest grounds to block mergers. Yet, this system applies not in all cases that are covered by the CMRD, as the EUMR only applies where a ‘concentration’ has a ‘Union dimension’ within the meaning of Article 1 and 3 of the EUMR. Thus, two cumulative conditions determine whether the one-stop-shop is available and with it the streamlined assessment of national interests involved in such a transaction. The EUMR will apply in many cases where a merger within the meaning of the CBMD exists because according to Article 3(1)EUMR it is relevant whether a change of control on a lasting basis occurs. As Article 3(2) clarifies such control can be ‘constituted by rights [such as shares], contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, [which] confer the possibility of exercising decisive influence on an undertaking’.54 Thus, the EUMR often applies already before a merger within the meaning of the CBMD comes into play, that is to say where for example a takeover takes place. While the requirement of a change in control within the meaning of the EUMR will be satisfied in many cases of cross-border mergers, the issue of Union dimension is crucial in the context deciding whether the EUMR will apply. Where this criterion is not met, the merger would in general only be subject to national merger regulations and the benefits of the EU one-stop-shop would be lost. The Union dimension is established by means of turnover thresholds established in Article 1(2) or (3) of the EUMR. Article 1(2) establishes two cumulative minimum thresholds55: (a) 5000 million € combined aggregate worldwide turnover of the undertakings concerned (b) 250 million € aggregate Union-wide turnover of each of the undertakings concerned. Article 1(3) sets out a second threshold based on four other criteria for mergers that do not meet the Article 1(2) threshold.56 The undertakings concerned must (a) 2500 million € combined aggregate worldwide turnover of all the undertakings concerned, and (b) 100 million € combined aggregate turnover of all the undertakings concerned in each of at least three Member States, and (c) 25 million € aggregate turnover of each of at least two of the undertakings in each of the three Member States included for the purpose of (b), and (d) 100 million 54

For examples with regard to means of how control can be obtained for the purpose of the EUMR, see Commission’s Consolidated Jurisdictional Notices, para 16–23. 55 The thresholds are not met where ‘each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.’ 56 These thresholds are again subject to the 2/3 provision highlighted above.

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€ aggregate Community-wide turnover of each of at least two of the undertakings concerned. The thresholds of Article 1(3), are designed to tackle concentrations that fall short of achieving Union dimension under Article 1(2) but could have a substantial impact in at least three Member States leading to multiple notifications under national competition rules.57 This rather strict regime of thresholds combined with the EUMR focus on undertakings in competition leads to a situation where many cross-border mergers are not subject to these rules. This can be either because the thresholds are not met or because the control of the undertaking does not change. At least for those cases that involve a transfer of control but do not meet the threshold, there is one more option of obtaining the benefits of EUMR’s one-stop shop and additional protection against the raising of public interests by the authorities of the member states. Pursuant to Articles 4(5) and 22 of EUMR concentrations which do not meet the thresholds may nevertheless be investigated under the EUMR by the European Commission if the undertakings concerned or a Member State makes such a request. An undertaking concerned may make such a request where the merger involves at least three jurisdictions. After the request, the Member States involved have 15 days-time to express their opposition against the referral to the Commission. This objection has the effect of preventing the referral to the Commission according to Article 4(5) of the EUMR. However, even if there is no objection from the Member States, the Commission would still consider whether it is best placed to review the case.58 If it finds that this is not the case, it will refer the case back to Member States according to Article 9 EUMR. While the risk of a referral back to the Member States is a concerne for merging parties fear that a Member State could invoke public interests against the merger, the option to veto the Commission jurisdiction is an even greater issue. Member State which aim to block a merger are likely to object to the referral to the Commission as this would take the case out of the hands of the Member State concerned and would reduce the leeway for invoking public interests against the merger.59 The situation is different where a member state makes the request for referral according to Article 22 of the EUMR. Rather than having the requirement that the merger involves at least three Member States, a substantive assessment is relevant. A member state within Article 22 of the EUMR can ask for a referral where the merger “affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States (emphasis added).” Other Member States can only provide observations but it is the Commission who is

57

Commission’s Consolidated Jurisdictional Notices, para 126. For the criteria used see Commission Notice on Case Referral in respect of concentrations [2005] OJ C 56/2 para 25–32. 59 This case might be mitigated by the fact that the Commission has knowledge of the case and has the normal tools (in particular infringement proceedings) at hand to intervene in the case where a violation of free-movement is to be feared. 58

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charged with this assessment. Thus in contrast to an Article 4(5) referral request, objections from the member states have no legal consequences. Yet, neither the Article 4(5) and Article 22 referral procedures are likely to be an effective shield against public interest based opposition to a merger. While in the case of Article 22 of the EUMR the company could lobby the Competition Authority within its home jurisdiction to make an Article 22 referral request, it would essentially accuse itself of significantly distorting competition by means of the envisioned merger. Similarly, the referral under Article 4(5) is also of little use. A company would first have to overcome the hurdle of having three jurisdictions involved, and second, and more importantly, the member state aiming to prevent the merger based on public interest grounds could simply veto the referral. In other words, the system of referral does not provide an effective way for undertakings involved in a merger, in particular SMEs, to shield themselves against Member States using public interest to block the merger. Hence, the EUMR and its protective one-stop-shop only applies to a limited amount of cross border mergers. In contrast, the CBMD, includes a very broad range of merger situations. It covers mergers between public and private limited liability companies60 and the three most common ways in which mergers are operationalized.61 Thus, in all these case Article 4(1)(b) and its protection against discrimination can come into play. However, in practice issues relating to public interest grounds are not exclusively encountered in the merger context. Instead, problems connected to the protection of public interest typically arise as a consequence of a shift in control, that is to say before the actual merger. A shift in control is usually determined by an equity purchase—which can take place within a takeover context or not—and which may in a case end up in a merger between acquirer and target, when the parties decide to take such an additional step.62 Hence, there is no exclusive connection between rules for the protection of national public interests and mergers as defined in the CBMD. Instead rules for the protection of public interest are likely to be triggered by a simple equity purchase which determines a shift in control. This shift in control turns the target into a subsidiary of a foreign parent company and is therefore subject to its industrial directives. Such foreign industrial directives are the usual source of concerns for the state where the target is incorporated. This is in particular the case where the acquirer is a foreign company subject to the directives of its state of origins.63 The idea of mentioning within the CBMD the opposition to a merger based on public interest as well as the EUMR seems understandable. However, it is not clear why such a provision on public interest opposition and competition law is contained only in the CBMD, whereas the problem of public interest defenses is not

60

Art 1 of the CBMD. Art 2, para 2 CBMD. 62 Details on different mergers and acquisition strategies are explained for instance in Gaughan (2010). 63 See (n 33 ff). 61

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mentioned—for instance—in the takeover directive.64 It may well be that one of the reasons why the EU legislator has decided to place the abovementioned provisions in the CBMD has mostly to do with terminology: CBMD and EUMR both refer to ‘mergers’. If the inclusion of Article 4(1)(b) is based this pure commonality in the terminology within two different fields of EU law, this choice may prove at least partly misleading. If one considers the operation of the EUMR,65 it becomes clear that its reach is far broader than the one of identified by the CBMD. This difference already becomes clear if one examines the official denomination of the so-called ‘EC (now EU) Merger Regulation’ which is actually ‘Regulation on the Control of Concentrations between Undertakings.’ In its Article 2 ‘concentrations’ are defined as changes ‘in control on a lasting basis’ deriving either from a merger or from ‘the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings.’ For a reason of efficient coordination of different branches of EU law, it may have been advisable to mention the problem at issue both in the Takeover and in the CBM Directives—so catching the full range of transactions which may trigger public interest defenses. One might therefore conclude two things. First, that the protection afforded by the EUMR is only available in a small number of cases, and second that the protection afforded by the CBMD would be required already at the stage of the takeover rather than the actual implementation of the merger. It is in the context of the takeover rather than merger that the public interest opposition will be relevant and it is also the time when the EUMR with its focus on the change of control becomes relevant.

5 Conclusion These are times of deep political and institutional transformations, not only within the European Union but also on a global scale. Hence the opposition to mergers based on public interest might see a revival. In the EU, Brexit has chilled what seemed to be an everlasting progression towards the enlargement of the EU. During the referendum on Brexit but also in other EU member states, national identities are often employed by politicians in defensive terms, showing obstacles towards further integration. On a global scale, the WTO is losing grip on the multilateral agenda. The new emerging scene is dominated by bilateral and plurilateral agreements, through which states are better able to tailor the protection of their national interests. In such a scenario, it is hard to imagine that the defence of public interest within merger

64 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJEU 30/04/2004 L 142/12. 65 For details see under Sect. 3.

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proceedings is going to disappear and be replaced an approached based on economic integration and open markets. The drafting of the CBMD may reflect a rather conservative stance, ‘respectful’ of the EU member states. These retain their autonomy in determining the extent to which they can protect their national interests by imposing only a non-discrimination requirement. However, as we have shown member states are more limited in their application of such rules. They will have to respect provisions on freedom of establishment and will even have to follow the strict procedural rules of the EUMR where a merger has a union dimension. However, beyond the EUMR the companies might face an uphill battle against governments’ opposition. The takeover directive seems not to bar member states from any form of opposition. It will thus be upon the companies to explore the relevant free-movement case law and to bring a case before a national court. Given the workings of the judicial process, it might take years before the case has been decided, in particular if a reference to the ECJ is involved. The Article 4(1) (b) therefore only comes into play where first, the EUMR is not applicable and second where the member state has not already intervened before the actual merger.

References Corradi MC (2018) Notes on competition and Justum Pretium theory and practice in medieval Italy: lessons for modern EU competition price theory? Antitrust Bull 63(3):330–349 Fenger N, Broberg MP (2011) Finding light in the darkness: on the actual application of the acte clair Doctrine. Yearb Eur Law 30 Galloway J (2007) EC merger control: does the re-emergence of protectionism signal the death of the ‘one stop shop’?. In: Draft Paper to the 3rd Annual CCP Summer Conference, vol 14 Gaughan PA (2010) Mergers, acquisitions, and corporate restructurings. John Wiley & Sons Hawk B (2018) English competition law before 1900. Antitrust Bull 63:350–374 Hilson C (1999) Discrimination in community free movement law. Eur Law Rev 24:445–462 Jones A, Sufrin B (2014) EU competition law: text, cases, and materials. Oxford University Press Kemp R, Kersten N, Severijnen A (2012) Price effects of Dutch hospital mergers: an ex-post assessment of hip surgery. De Economist 160(3):237–255 Kryda G (2002) The competition criterion in British merger control policy. Policy Stud J 30 (2):252–269 Monti G (2017) The United Kingdom’s contribution to European Union competition law. Fordham Int Law J 40(5):1443–1474 Nakashima E (2018) Supreme Court to hear Microsoft case: A question of law and borders. Washington Post. https://www.washingtonpost.com/world/national-security/supreme-courtcase-centers-on-law-enforcement-access-to-data-held-overseas/2018/02/25/756f7ce8-1a2f11e8-b2d9-08e748f892c0_story.html?utm_term¼.7905abd72b12. Accessed 30 Mar 2018 Reader D (2017) At a crossroads in EU merger control: can a rethink on foreign takeovers address the imbalances of globalisation. Eur Competition Regul Law Rev 2 Reader D (2018) Accommodating Public Interest Considerations in Domestic Merger Control: Empirical Insights. CCP Working Paper 16-3. http://competitionpolicy.ac.uk/publications/work ing-papers/working-paper-16-3. Last Access 29 Mar 2018 Scott A (2009) The evolution of competition law and policy in the United Kingdom. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id¼1344807##. Last access 20 Mar 2018 Which R, Bailey D (2015) Competition law. Oxford University Press

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Wise M (2004) Review of competition law and policy in the United Kingdom. OECD J Comp Law Policy 5(3):57–140

Marco Corradi is senior research fellow and lecturer at the Stockholm Centre for Commercial Law—where he co-directs the comparative business law research panel—visiting professor at ESSEC Business School in Paris and in Singapore and visiting fellow at IECL, Oxford. Previously he was senior lecturer in law at Lund University, where he taught European and comparative corporate law, international trade law, maritime finance and M&A law. His academic research focuses on corporate law and competition law. Marco also has extensive experience in policy research commissioned by European and non-European Governments and Independent Authorities in matters of trade law and competition law. Marco was awarded by the University of Oxford an LLM (MJUR), an MPHIL and a PHD (DPHIL) in European and comparative corporate law. He also holds a PHD in Competition Law and Economics from Richard Goodwin Business School (Siena). As an undergraduate, he studied law at Bologna University (Alma Mater Studiorum). He is admitted to the Bologna bar and accredited as a business mediator in the City of London. He is also a member of the German Arbitration Institute (DIS). Julian Nowag is associate professor (docent) in EU law at Lund University specialised in competition law and the director of the Master programme in European Business Law. He is also an associate at the Oxford Centre for Competition Law and Policy where he is on the editorial board of The Journal for Antitrust Enforcement as managing editor. Julian earned a Master’s degree (MSt) and a doctorate (DPhil) from the University of Oxford. He also completed an LLM in European Legal Studies at Durham University and undergraduate law studies in Germany and Austria.

Unions’ Freedom to Establish and Provide Services Ewan McGaughey

1 Introduction While some say Europe should be a ‘superpower’,1 they often seem to want a ‘supermarket’. At the heart of European politics, it is often debated whether the ‘economy’ or ‘society’ comes first.2 Nowhere is this more true than in cross-border mergers. Here, raw conflicts between capital and labour still play out. The CrossBorder Merger Directive 2005 article 16 envisages that, when a cross-border merger takes place, trade unions and employing entities will bargain for worker participation in corporate governance.3 That bargaining happens in the shadow of the law, because if employees already have voice in a merging company (with over 500 staff), but the new merged company will be incorporated in a member state requiring weaker voice, employees have the right to at least the same voice they had before.4 This is the ‘before and after’ principle. But under article 16(7) that right expires on 3 years. If the company transforms again, workers would have to bargain I am very grateful to Zoe Adams, Rüdiger Krause, Andy Morton and Francis Jacobs for comments and discussion. Please email all ideas or criticism to [email protected]. 1 e.g. Blair (2000). cf. BBC Newsnight, Interview with Giscard d’Estaing (29 October 2002) BBC Archive. 2 cf. Defrenne v Sabena (No 2) (1976) Case 43/75 referring to what is now TFEU art 157 on equal pay, saying ‘this provision forms part of the social objectives of the community, which is not merely an economic union, but is at the same time intended, by common action, to ensure social progress and seek the constant improvement of the living and working conditions of their people, as is emphasized by the Preamble to the Treaty.’ 3 Cross Border Merger Directive 2005/56/EC art 16(2)-(4). 4 Employee Involvement Directive 2001/86/EC arts 3-13 apply.

E. McGaughey (*) King’s College London, London, UK e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_9

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or strike to maintain their voice. Legislation does not yet make workers’ legal rights in this situation explicit.5 Such a system might work fairly if bargaining power between labour and capital were equally supported by law.6 But the notorious opinions of Viking and Laval held that business’ rights to establish and provide services can (ostensibly) be used to challenge workers’ fundamental rights to collectively bargain and strike. This chapters asks, is a new balance of power possible in cross-border mergers, and generally for labour voice in corporate governance?7 In Viking and Laval, the Court of Justice never had the benefit of submissions that unions have rights to establish and provide services, as much as business. Clearly this issue goes beyond cross-border mergers. First, it affects companies that want to establish in another member state without adequate worker participation rights (e.g. a German business sets up a Belgian SA). Although the Court of Justice has strongly indicated that companies cannot simply evade worker voice under the guise of free movement,8 a negotiated solution through collective bargaining is preferable to litigation. Second, it affects companies that operate from one member state without worker voice into another member state with it (e.g. a UK plc providing services in Denmark). Domestic codetermination legislation can in principle extend to foreign corporate forms,9 but until member state legislation catches up, unions need to bargain. Third, it affects member state company forms that transform into European Companies. While the Employee Involvement Directive 2001 enables worker voice ‘before’ a transformation to be maintained ‘after’, the actual results depend on the relative bargaining power of the parties. EU law on the right to collectively bargain, and take action, shapes results. This chapter is organised as follows. Section 2 offers reasons why, on a plain reading of the Treaties, trade unions do have rights to establish and provide services. It sets out the background of case law in Viking and Laval and assesses the legal

5 There are arguably implicit legal rights, on a series of grounds, to be consulted and participate. For example, the Charter of Fundamental Rights of the European Union art 27 enshrines the right of ‘consultation’, which while not self-standing, must be used to interpret other legislation. Consultation means a duty to negotiate, and if no outcome is reached, and arguably the unilateral abolition of worker voice by management will be an abuse of rights. 6 Unequal bargaining power is consequent on three main factors: (1) inequality in resources or wealth: Smith (1776) Book I, ch 8, §12, (2) inequality in collective organisation: Mill (1848) Book V, ch XI, §12, and (3) asymmetry of information: Jevons (3rd edn 1888) ch 4, §74. 7 Van Cleynenbruegel (2018) has also begun this enquiry, developing a compelling argument focusing on receipt of services. 8 e.g. Erzberger v TUI AG (2017) C-566/15, [39] discussed in ‘Good for Governance: Erzberger v TUI AG and the Codetermination Bargains’ (18 April 2017) Oxford Business Law Blog. Überseering BV v Nordic Construction Company Baumanagement GmbH (2002) C-208/00, [92] ‘overriding requirements relating to the general interest, such as the protection of the interests of creditors, minority shareholders, employees and even the taxation authorities, may, in certain circumstances and subject to certain conditions, justify restrictions on freedom of establishment.’ 9 This is expressly true of Danish codetermination law and Norwegian law: see Erzberger v TUI AG (2017) C-566/15, discussed in the AG Saugmandsgaard Øe Opinion, [83] fn 58.

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implications of recognising those rights alongside existing service and establishment law. Section 3 addresses whether, as a matter of policy, it is desirable for trade unions to use rights to establish and provide services. The spectre of competition law, and an ugly history of social and democratic oppression has always loomed, and currently looms, independently from this debate. But unions have the opportunity to embrace their rights to provide services to their members and to establish, within their higher social and political functions. If unions embrace their rights, like businesses, they become explicitly protected in taking cross-border collective action without unjustified restrictions to establish bargaining units, and require that employers bargain in good faith. The EU is committed to fundamental principles of international law,10 and to its member states’ democratic traditions. It sees that labour is not a commodity, that peace works through social justice, that workers’ rights are human rights, and that as against corporate entities human freedom comes first.

2 Union Freedoms Under the Treaties? Few lines of case law in recent history have been scrutinised by European lawyers as much as Viking, Laval, and its successors.11 But despite the volume of literature, the principle of trade union freedom in the Treaty on the Functioning of the European Union has not been fully discussed. This may be unsurprising. The opinions in Viking and Laval subtly (or perhaps overtly) framed the terms of the debate as if the EU treaties put economic union first, and a social union second.12 On this view, the four freedoms of moving goods, services, labour and capital, are primarily freedoms that benefit business. Human rights are less important. As many people have pointed out already, that understanding must be regarded as mistaken. This section summarises (1) the background debate,13 (2) how unions have rights to provide services, and (3) to establish.

10 See the International Covenant on Social, Economic and Cultural Rights 1966 art 8, on the ‘right of everyone to form trade unions’ with ‘No restrictions’ except as prescribed by law, necessary in a democracy, for security, order and to protect rights and freedoms of others. Also: ‘The right to strike, provided that it is exercised in conformity with the laws of the particular country.’ 11 Two examples of polite but devastating criticism are found in Deakin (2008) ‘Given the clear wording of the Directive and the wider institutional context of social policy in which it is set, how can the Court’s view in Laval be explained?’ Joerges and Rödl (2009), pp. 15–19. See further Freedland and Prassl (2014) and Davies (2008). 12 This diverted, without justification, from the principle in Defrenne v Sabena (No 2) (1976) Case 43/75 that the European Union ‘is not merely an economic union, but is at the same time intended, by common action, to ensure social progress and seek the constant improvement of the living and working conditions of their people’. 13 Those well acquainted with the background may skip to part 2(2).

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The Background of Union Freedom: Viking, Laval and Pre-Emption

The problems of Viking and Laval are common to all plural legal systems, in a globalising world. When legal systems collide, there are three main choices. First, two systems can each pass conflicting norms, and leave their resolution to political settlement or economic power. For instance, World Trade Organisation rules enable economic retaliation if countries put up unjustified tariffs.14 Second, one system can prevail over, or ‘pre-empt’ another. For instance, in the US the federal Clayton Antitrust Act of 1914 §6 mandated that, whatever state law says, trade unions shall never be subject to competition law liability because ‘labor is not a commodity’.15 Third, one system can set minimum standards that other systems may improve upon. The Working Time Directive 2003 requires 4 weeks (or 28 days) paid holidays. But it enables, say, France to have 36 days. Admittedly, what counts as ‘minimum’ standards depends on one’s view. A worker’s minimum right to 28 days paid holidays is also an employer’s maximum right to make staff work for 337 days (minus weekends and maximum hours). The dominant view is that social policy’s goal is to ensure a minimum floor of rights favouring the party with less bargaining power, or in need of protection: workers, consumers, tenants, the environment, and so forth. Law replaces arbitrary market outcomes with democratic norms. Member states in a transnational system should be like laboratories of democracy,16 experimenting beyond the floor of the law. In its early days, Europe’s Spaak Report reasoned there was no need to have common rules on labour rights at all, because exchange rates could adjust to reflect each member state’s productivity.17 Different labour standards were certainly no barrier to free movement. But would this lead to a race to the bottom in labour rights? Capital moves faster than labour, but among democratic societies, ideas move faster than capital. If countries remained democratic, so that experiments in social policy continued,18 a bottom might not be reached. Nevertheless a legitimate function of European governance was to spread best practice. Like ironing out creases in a patchwork quilt, the view developed that companies should not be able to exploit 14

WTO Agreement, Annex 2, Understanding on rules and procedures governing the settlement of disputes, art 22. The fact that the process of economic retaliation is meant to follow a legal procedure cannot be seen as an adequate functional substitute for actual judicial procedures found, for instance, in EU law. 15 Clayton Act of 1914, 15 USC §17. 16 New State Ice Co v Liebmann, 285 US 262 (1932) per Brandeis J. 17 Spaak Report, Comite Intergouvernemental créé par la conference de Messine. Rapport des chefs de delegation aux ministres des affaires etrangeres (21 April 1956) Unofficial translation by ECSC Information Service (June 1956). 18 New State Ice Co v Liebmann, 285 US 262 (1932) per Brandeis J, ‘It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country. This Court has the power to prevent an experiment.’

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lower labour rights in one country, to unfairly compete with others. So, there were rules for equal pay between women and men. A new social chapter was embraced by every member state after the Treaty of Amsterdam.19 EU legislation and case law developed to embed social rights.20 But then, a proposed Directive led by Commissioner Frits Bolkestein argued that to become the most ‘competitive’ and ‘dynamic’ economy in the world, Europe should abolish all ‘barriers’ to market access for (business) service providers.21 The draft said if a service provider complied with rules in its ‘country of origin’ it should not have to comply with rules of any other country, even though it operated abroad. This proposal would have let companies set up paper headquarters in member states with low regulation, while concentrating their lobbying efforts in Brussels to cut EU regulation even more. It would probably have damaged EU competitiveness and dynamism because companies would be competing not to improve quality, but cut wages, taxation and social standards. In this ‘cut-throat competition’,22 the bad corporation would have led the good, and the worst would have led the bad.23 Like a Hayekian dystopia, where democratic decision making is crippled, unrestricted free movement of business risked meaning unrestricted evasion of law.24 The Bolkestein proposals triggered protests around Europe, resembling opposition from 2012 to the Transatlantic Trade and Investment Partnership.25 Meanwhile in 2005 both France and the Netherlands held referendums on a new Constitution for Europe. With opposition to the Bolkestein Directive already stoked, Dutch and French voters rejected the Constitution.26 In the end, the Services Directive 2006 passed with exemptions for labour, public services, and with no ‘country of origin’ rule. However, a small group of lawyers decided that what could not be won in a

19 The ‘social chapter’ of the Treaty of Maastricht 1992 was rejected by the UK government, at that time run by the Conservative Party. When the Labour Party won the 1997 election, it joined the social chapter. The fact that the Conservatives have never been reconciled to labour rights (or financial regulation) explains some of their passion for ‘Brexit’. 20 See also Lecomte (2011). 21 Grossman and Woll (2011). 22 cf. Cook (1879) ch I, 4. 23 cf. Winston Churchill MP, Trade Boards Bill, Hansard HC Debs (28 April 1909) vol 4, col. 388. 24 cf. Hayek (1960) ch 12, The American Contribution: Constitutionalism, 161, applauding how enforced free movement could halt ‘economic control’ for tax, labour rights or public services, which could ‘be effective only if the authority exercising them can also control the movement of men and goods across the frontiers of a territory’. 25 Lindstrom (2012). 26 The French rejected the Constitution by 55% to 45% on a turnout of 69% (29 May 2005). The Dutch rejected the constitution by 61% to 39% on a turnout of 62% (1 June 2005).

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deliberative democratic process,27 namely decoupling economic growth from social progress,28 might be litigated before the European Court of Justice. So, in ITWF v Viking Line ABP the Finnish shipping company Viking Line ABP claimed that the International Transport Workers Federation, a union of shipping workers, violated its right of establishment (now in TFEU art 49) by striking for fair wages. The company was renouncing a Finnish collective agreement, and putting new staff on Estonian contracts, by changing the flag of its ships from Finnish to Estonian.29 The union, headquartered in London, took strike action by blockading Viking’s ships. The company was represented by English barristers.30 The Court of Justice, following an opinion of Advocate General Maduro, held that although the right to strike was a fundamental human right, its exercise by the ITF had been a disproportionate infringement of the business’ right of establishment.31 Instead of evaluating which right has greater importance, the Court felt that strike action in this instance was disproportionate because the workers’ ‘jobs or conditions of employment’ were not ‘jeopardised or under serious threat’.32 Both the Advocate General and Court opinions in Viking displayed a real need for improvements in their education regarding labour rights. First, strikes are not legitimate merely when jobs or conditions are ‘under serious threat’. Collective bargaining, without the right to strike, is collective begging.33 Strikes not only protect but advance fair wages, human development, secure voice at work and voice in politics. Second, the reason collective action is a human right is it has consistently been the vanguard of democracy. Strikes deposed the Kaiser. Strikes ended British Imperial rule in India. Strikes collapsed the Iron Curtain. Strikes finished apartheid in South Africa. Strikes are not comfortable, and employers who leave no alternative to strikes cause economic loss to their businesses and communities. But the right to strike is essential precisely so that does not need to be used. ‘People who are hungry and out of a job are the stuff of which dictatorships are

27 This is not to suggest that referendums are a necessary part of a ‘fair democratic process’. Referendums may be especially susceptible to manipulation, both in the framing of the question, timing, media focus, or external interference: e.g. Zurchner (1935) on crude, but still familiar strategies. 28 cf. Scharpf (2002). 29 ITWF and Finnish Seamen’s Union v Viking Line ABP and OÜ Viking Line Eesti (2007) C-438/ 05, [2007] I-10779. 30 See also ITWF v Viking Line ABP [2005] EWCA Civ 1229. 31 Viking (2007) C-438/05, [44] ‘the right to take collective action, including the right to strike, must. . . be recognised as a fundamental right which forms an integral part of the general principles of Community law’, but ‘the exercise of that right may none the less be subject to certain restrictions. . . in accordance with Community law and national law and practices.’ 32 Viking (2007) C-438/05, [81]. 33 Siegel (1964), p. 46, referring to Jules Kolodney, during teacher strikes, ‘In New York, you can’t have true collective bargaining without the implied threat of a strike. If you can’t call a strike you don’t have real collective bargaining, you have ‘collective begging.”

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made’,34 but the right to take collective action ensures people can do a fair day’s work for a fair day’s wage. Following Viking, the Court decided Laval un Partneri Ltd v Swedish Builders Union.35 Here a Latvian building company claimed the Swedish Builders Union violated its right to provide services (now in TFEU art 56). Laval Ltd. refused to sign a collective agreement to pay its Latvian workers the same as their Swedish colleagues. It was blockaded in a strike, and went insolvent. As the company’s workers were ‘posted’, the Posted Workers Directive 1996 might have helped. Article 3(1) says ‘Member States shall ensure that, whatever the law applicable to the employment relationship’ undertakings should guarantee workers the terms of ‘collective agreements or arbitration awards which have been declared universally applicable’. Sweden did not make its collective agreements universally applicable. So, article 3(7) or recital 17 might have given the solution, as they say mandatory rules for minimum protection in force in the host country must ‘not prevent the application of terms and conditions of employment which are more favourable to workers’. Article 3(1) set minimum standards that collective agreements could improve upon.36 But the Court of Justice held a strike to enforce standards in any collective agreement not declared universally applicable would infringe Laval’s right to provide services. For reasons unconnected to the law’s text or purpose, it interpreted the PWD 1996 as creating maximum standards. It said the ‘right to take collective action for the protection of the workers of the host state against possible social dumping may constitute an overriding reason of public interest’. Yet it felt that the ‘lack of provisions, of any kind, which are sufficiently precise and accessible’ in the collective agreement, apparently made it ‘difficult in practice’ for companies like Laval to understand a collective agreement.37 As well as an astonishing misreading of the PWD 1996, this showed a wild misunderstanding of how collective bargaining functions. Companies know their obligations because they agree them, and if they do not agree to pay fair wages, they will know it when they face strikes. Viking and Laval were not inevitable results of EU law. They were political choices. Those choices had consequences. In 2008 in the UK, a dispute broke out after Alstom, a power company, contracted Spanish and Polish businesses to build power stations in Nottinghamshire and Kent. The company used labourers paid 40% less than the collectively agreed wage for similar UK workers.38 In 2009, despite

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Roosevelt (1944). Laval Un Partneri Ltd v Svenska Byggnadsarbetareforbundet (2008) C-319/05, and C-319/06. 36 This is all the more clear given that TFEU art 153(4) which says member states can maintain ‘more stringent protective measures compatible with the Treaties.’ The CJEU, on completely inadequate grounds, dismissed this on the basis that improvement had to be compatible with the Treaties, and therefore (somehow) collective agreements were not good enough. 37 Laval (2008) C-319/05, [110] referring to Arblade. 38 UNITE Press Release, ‘Isle of Grain Power Station: UK workers excluded, EU workers exploited’ (13 March 2009). 35

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secondary action being suppressed in UK statute,39 engineers went on strike across the country in sympathy with workers at the Lindsey Oil Refinery in Lincolnshire.40 They carried banners saying ‘British jobs for British workers’. This was a slogan that implicitly advocated race discrimination contrary to UK and EU law, for which ex-Prime Minister Gordon Brown was responsible. Yet it responded to people driven to desperation during sustained wage cuts in the financial crisis.41 The European Commission, which could see the effects that Viking and Laval had, responded.42 Viking and Laval were reversed by legislation, as the Rome I Regulation reaffirmed that where systems of law conflict, the standards to be preferred in employment are those most favourable to the employee.43 Nevertheless, the Court of Justice persisted with ruling in Rüffert v Land Niedersachsen in 2008 that public procurement policy should not require bidders to comply with a local collective agreement.44 Here, the Lower Saxony government required that companies contracted out to do public works comply with local collective agreements. But the Court of Justice held that fair wages for workers in Germany would be unfair for a business in Poland. This decision failed to see that a Polish company could pay exactly the same wages as a German company, and still outcompete it on quality and profit margins, with no competitive disadvantage. Banning common wage standards makes lower-wage countries poorer, and further segregates the internal market. In 2010 after the Rome I Regulation, the Court appeared to pause it position in Commission v Germany.45 But in

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See RMT v United Kingdom [2014] ECHR 366. Kilpatrick (2009). 41 See the statement in Hansard HC Debs (4 February 2009) col 842, Colin Burgon MP: ‘Does the Prime Minister agree that the threat to British workers does not come from other European workers, but from the workings of the unregulated capitalism. . .?’ Prime Minister Gordon Brown: ‘an expert review has been set up in the European Union to look at the impact of the Laval, Viking and other judgments, and a group of employers and the work forces are also meeting to review that at the same time. When they reach their conclusions, we will look at what they have to say.’ 42 Špidla (4 February 2009). 43 Rome I Regulation (EC) No 593/2008 recital 34 ‘The rule on individual employment contracts should not prejudice the application of the overriding mandatory provisions of the country to which a worker is posted in accordance with Directive 96/71/EC of the European Parliament and of the Council of 16 December 1996 concerning the posting of workers in the framework of the provision of services.’ 44 Rüffert v Land Niedersachsen (2008) C-346/06. 45 Commission v Germany (2010) C-271/08, [52] suggesting that a ‘fair balance’ should be achieved between ‘the level of the retirement pensions of the workers concerned, on the one hand, and attainment of freedom of establishment and of the freedom to provide services, and opening-up to competition at European Union level, on the other (see, by analogy, Case C-112/00 Schmidberger [2003] ECR I-5659, paragraphs 81 and 82).’ See Syrpis (2011). 40

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Bundesdruckerei,46 and RegioPost,47 it reincarnated the same ideas. Again, these rulings were in effect reversed by legislation, in the Public Procurement Directive 2014.48 Reversing ideology is harder. This requires reading the Treaties and the Charter as a coherent whole, and to expressly acknowledge that workers rights are fundamental to democratic life.

2.2

Service Provision

A plain reading of the TFEU suggests that trade unions have a right to provide services under article 56. Under article 57, ‘services’ mean those that ‘are normally provided for remuneration’.49 A list of examples (which is not-exhaustive) includes ‘activities of the professions’. Trade unions, of course, have long been acknowledged to provide services.50 Their core functions include providing services such as sickness insurance, death benefits, legal advice and assistance. Their services also include providing workplace representation in employer negotiation, grievances or disciplinary hearings, and in collective bargaining.51 Member state legislation often refers to the services that unions provide, for instance to ensure workers will ‘not be subjected to any detriment’ by ‘making use of trade union services’.52 The remuneration unions receive is usually in membership fees, through an employer’s payroll, in cash or by direct debit. It is true that non-union members, who do not pay fees, also benefit from unions.53 For instance the ‘union wage premium’, or the benefit of being in a

46 Bundesdruckerei GmbH v Stadt Dortmund (2014) C-549/13, at [34] saying a minimum wage could not be imposed ‘which bears no relation to the cost of living in the Member State in which the services relating to the public contract at issue are performed and for that reason prevents subcontractors established in that Member State from deriving a competitive advantage from the differences between the respective rates of pay, that national legislation goes beyond what is necessary to ensure that the objective of employee protection is attained.’ The court misses the point that any company in another member state, even with lower living costs, is at no competitive disadvantage, because the procuring authority will be paying to cover those costs. Companies then compete on profit margins and quality. Higher procurement wages accelerate growth in low wage countries. 47 Regiopost GmbH & Co KG v Stadt Landau in der Pfalz (2015) C-115/14. 48 Public Procurement Directive 2014/25/EU art 18. 49 Nb the Services Directive 2006/123/EC art 4(1) merely refers back to the Treaty. 50 e.g. Webb and Webb (9th edn 1926) Part II, 160, on mutual insurance. 51 Ewing (2005). 52 In the UK, the Trade Union and Labour Relations (Consolidation) Act 1992 s 146. 53 This is possible because the ‘closed shop’ was abolished in Europe, largely following Young, James and Webster v United Kingdom [1981] ECHR 4, while in the US unions can only collect fees from non-union workers in certain states. This is currently being threatened by the Republican majority on Trump’s Supreme Court. See Janus v AFSCME, _ US _ (2018).

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unionised workplace, has been estimated as being around 2–3% in France,54 around 5–10% in the UK,55 and as much as 22% among US private sector workers.56 There are significant social benefits (or ‘positive externalities’) from unions’ existence. But just as much as unions have a right to provide services, people who are not yet, but could be union members have a right to receive services.57 Those services of a union—especially the benefits of a collective agreement—must be able to be received by a non-union member across borders without restriction, unless justified under TFEU article 52 by laws on the grounds of ‘public policy, public security or public health.’58 In this way, the Treaties’ structure can be seen to achieve the same result as that in the International Covenant on Economic, Social and Cultural Rights 1966 article 8.59 Every European Union member state has ratified this and it is part of customary international law.60 The law of member states still applies if union activity does not cross borders.61 However, in the cases of both Viking and Laval, and any situation where business operates across borders, and unions respond, that criteria will be fulfilled. So, a Finnish union may provide its services of collective bargaining to Estonian workers under EU law. A Swedish union must, without unjust restriction, be able to collectively agree to cover Latvian workers. It might be argued that strike action by Finnish and Swedish unions harmed Estonian and Latvian workers, excluding them from jobs. But this type of argument misrepresents the real case, that it is employers who hold workers jobs to ransom, unless workers accept a lower wage. Such arguments, if accepted, only further a short-term business agenda of dividing workers from one another. The real effect, of stopping the benefits of good collective agreements to cross borders, is to hold back European development, stall growth in lower-income member states, segregating markets and society. This ends up harming business itself, and its long-term stability, for questionable short-term profit.

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Breda (2015). Forth and Bryson (14 July 2012). 56 Gabriel and Schmitz (2014). 57 Geraets-Smits v Stichting Ziekenfonds and Peerbooms v Stichting CZ Groep Zorgverzekeringen (2001) C-157/99, held that health care was a service even though it was partly government funded. See in detail Van Cleynenbruegel (2018). 58 TFEU art 52, which is referred to by analogy from art 62. 59 ICESCR 1966 art 8, ‘No restrictions may be placed on the exercise of this right other than those prescribed by law and which are necessary in a democratic society in the interests of national security or public order or for the protection of the rights and freedoms of others.’ 60 It reflects what was already implicit in the Universal Declaration of Human Rights 1948 arts 20–24. 61 TFEU art 56, ‘Within the framework of the provisions set out below, restrictions on freedom to provide services within the Union shall be prohibited in respect of nationals of Member States who are established in a Member State other than that of the person for whom the services are intended.’ 55

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Establishment

Because unions provide services, they also have the right to establish in TFEU article 49.62 Examples of the right of establishment ‘include’ people pursuing ‘activities as self-employed persons and to set up and manage undertakings’, but this list is not exhaustive. Non-self-employed entities and non-undertakings, like unions and other social movements, have a right to establish and pursue their activities too. Unions establish by setting up offices, organising a bargaining unit, or any collective agreement, lasting on ‘a stable and continuous basis’.63 Unions establish work councils, for the purpose of information, consultation, and participation in the management of enterprise. They establish representative mechanisms in pension funds and regulatory institutions. Unions also establish employee voting in company general meetings, organise elections by employees for seats on company boards, and they nominate directors. No restrictions are allowed, except those that are non-discriminatory (i.e. at least as favourable as existing member state law), are ‘justified by imperative requirements in the general interest’, and are proportionately applied.64 Unions may initially establish their offices without any employer involvement, but to provide their essential services of collective bargaining and voice at work, they negotiate and strike. Just as ‘the right. . . to strike is an essential element in. . . collective bargaining’,65 and ‘clearly protected’ by article 11 of the European Convention,66 the right of a union to take all forms of collective action is essential to freedom of establishment. Just as the Court of Justice has recognised that employees’ rights of consultation entails an ‘obligation to negotiate’ by an employer,67 there can also be an obligation to negotiate on employers (in good faith) to ensure that unions’ right of establishment is genuinely effective.68 For example, in Viking, the problem was never that the employer’s right of establishment was infringed by the union’s strike: quite the reverse. On this view, the failure of Viking ABP to negotiate in good faith, and ultimately promise to pay wages to its TFEU art 49, ‘Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.’ 63 cf. Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano (1995) C-55/94, [25] holding that a German lawyer’s right of establishment could be infringed if the duty to register in Italy was applied is a discriminatory or disproportionate manner. 64 Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano (1995) C-55/94, [37]. 65 Crofter Hand Woven Harris Tweed Co Ltd v Veitch [1941] UKHL 2, per Lord Wright. This understanding directly informed the European Convention on Human Rights 1950 art 11. 66 RMT v UK [2014] ECHR 366, [84] though hesitating to call it an ‘essential element’. It seems EU law could go further. 67 Junk v Kühnel (2005) C-188/03, [43] holding the Collective Redundancies Directive 1998 ‘imposes an obligation to negotiate’. 68 CFREU 2000 art 47 requires that legal rights are effective. This includes the right to strike. 62

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workers according to a collective agreement, was an infringement of the union’s right of establishment. Had Viking ABP negotiated, and had a strike still occurred, the conflicting rights of the business and the union to establish would have simply cancelled each other out. Viking ABP should have no more complained about being blockaded by a union than it could about another more efficient business drawing its customers away.69 Explicit recognition of the fundamental right of establishment leaves open the very distinct possibility that European Union law’s standards would exceed the minimums set under the European Convention on Human Rights, to which the EU is bound to be a party. Plainly the functions of each institution differ. The ECHR, in its current membership, has also to guard adherence to human rights in legal systems that remain in a process of development. The ECHR has acknowledged the rights to join a union, collectively bargain, and to strike, which apply even to systems which poor labour rights records such as Russia, Turkey and (it must for the time being be said) the United Kingdom. It has declined in particular to strike down prohibitions on secondary action,70 disproportionate balloting rules, or restrictions on essential services.71 But while the European Court of Human Rights applies a ‘margin of appreciation’ test for 50 member countries, European Union law directly applies a proportionality test to the issue at hand. Much of the degradation in labour rights seen in the UK, or any system approaching the painful de-development of the United States,72 can be halted by a watchful Court of Justice.73

69

Put another way, and in contrast to the ambiguities found in Schmidberger v Austria (2003) C-112/00, the union’s right of protest (to establish a bargaining unit) is accorded an equal weight to the business’ right of establishment. 70 RMT v United Kingdom [2014] ECHR 366, [104]. 71 Hrvatski Lijecnicki sindikat v Croatia [2014] ECHR 1337. 72 See McGaughey (2018). 73 Compare Certification of the Constitution of the Republic of South Africa [1996] ZACC 26, [66] ‘Collective bargaining is based on the recognition of the fact that employers enjoy greater social and economic power than individual workers. Workers therefore need to act in concert to provide them collectively with sufficient power to bargain effectively with employers. Workers exercise collective power primarily through the mechanism of strike action. In theory, employers, on the other hand, may exercise power against workers through a range of weapons, such as dismissal, the employment of alternative or replacement labour, the unilateral implementation of new terms and conditions of employment, and the exclusion of workers from the workplace (the last of these being generally called a lockout). The importance of the right to strike for workers has led to it being far more frequently entrenched in constitutions as a fundamental right than is the right to lock out. The argument that it is necessary in order to maintain equality to entrench the right to lock out once the right to strike has been included, cannot be sustained, because the right to strike and the right to lock out are not always and necessarily equivalent.’

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3 Should Union Rights be Acknowledged? Although it seems plain that an ordinary reading of the Treaties provides unions with the right to provide services and establish, it does not follow that recognition of those rights is desirable. Three possible arguments could be advanced: (1) that courts could endanger union rights, and ought not to be trusted, (2) that competition law might be applied to unions, restoring a modern Lochner era in Europe today, and (3) that seeing unions as service providers and having a right to establish detracts from their social and political functions. There are, however, good reasons to think that each of these concerns is unwarranted.

3.1

Mistrust of Judges

First, would it be a danger to allow the courts to interpret unions’ rights to provide services and establish? As the great European labour lawyer, Otto Kahn-Freund, put it, ‘the power to interpret. . . is the power to destroy’.74 The experience of the US in the Lochner era, the UK following the Taff Vale case, or indeed the EU following Viking and Laval may not inspire confidence. However, just as Viking and Laval made clear, this danger of judicial overreach exists whether or not one believes the judiciary should be empowered. The real guards against judicial abuse of power are education, the force of opinion and civil society, requiring attachment to one fundamental principle: judges set out minimum standards for labour rights, and never maximum standards.75 Consensus can be achieved by opening the arguments, not hiding them. The principle of minimum standards does drive the EU constitution’s approach to labour rights, at least most of the time, and will be integral to the Treaties if they are to remain a force for ‘social progress’.76

3.2

Competition Law and Labour

Second, could lawyers seize upon the fact that unions have a right to provide services and establish as an excuse to apply competition law? The answer to this must be no, and it must be no regardless of whether unions have freedom to establish and provide

74

Kahn-Freund (1976), p. 244, himself paraphrasing Marshall CJ in M’Culloch v Maryland (1819) 4 Wheat 316, 431, ‘The power to tax involves the power to destroy.’ 75 This should have already been clear from a consistent interpretation of TFEU art 153(4)–(5). 76 TEU art 3(3), ‘It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.’

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services. Quite apart from this debate, the Court of Justice recently held in FNV Kunsten Informatie en Media v Staat der Nederlanden that staff in a Dutch orchestra were probably employed under sham self-employment contracts.77 When the orchestra members, each earning very modest wages, tried to organise they were told that they could have violated the competition law prohibition on collusion between undertakings. The court suggested that self-employed people could be regarded as undertakings under TFEU article 101, which prohibits collusion. This was not inconsistent with another Dutch case, Wouters v Algemene Raad van de Nederlandse Orde van Advocaten. Here the Court of Justice held that registered members of the Dutch bar like other ‘entities’ were undertakings,78 that the Dutch Bar Association was therefore an ‘association of undertakings’, but ultimately that its decisions to regulate professional standards was outside the scope of competition law. While it escaped scrutiny from labour laywers, arguably Wouters already went too far by conflating ‘entities’ which had previously been subject to competition law with real human beings. By contrast, and like Viking, the FNV case invited severe criticism for suggesting people who work for a living could face competition law sanctions.79 In international law ‘everyone’ has the right to unionise, and to strike, as a fundamental human right.80 This must include self-employed people such as taxi drivers,81 criminal barristers,82 or any individual who personally performs work. The appropriate construction of EU law, which is plainly expressed in the Treaties, is that there are three categories of actor: undertakings subject to competition law, other service providers, and workers. Consistent EU case law establishes a division between people who are workers, and those who provide services. The same division, between employed and self-employed, is relevant for most legal systems’ employment rights, and status in tax and social security. The historical consensus over the twentieth century emerged that workers are never and must never be subjected to competition law. This is fundamental to every modern democracy since the US Clayton Act of 1914. When workers were subjected to the US Sherman Antitrust Act of 1890, it meant that Eugene Debs, America’s first socialist Presidential candidate, was sent to prison for organising a strike.83 Before 1914, it led to damages and injunctions being imposed on unions for trying to collectively bargain.84 That Lochner era of jurisprudence ended in the Wall Street crash and the Great Depression: there are very good reasons to support labour freedom.

77

FNV Kunsten Informatie en Media v Staat der Nederlanden (2014) C-413/13. Wouters v Algemene Raad van de Nederlandse Orde van Advocaten (2002) C-309/99, [46]–[49]. 79 de Stefano and Aloisi (2018). 80 Universal Declaration of Human Rights art 23. International Covenant on Economic, Social and Cultural Rights 1966 art 8. 81 Topham (10 February 2016). 82 Thompson (2 April 2018). 83 In re Debs 64 Fed 724 (CC Ill 1894), 158 US 564 (1895) Listen to the documentary by Bernie Sanders and Jane Sanders, Eugene V. Debs Documentary (1979) youtube.com. 84 Loewe v Lawlor 208 US 274 (1908). 78

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Properly understood, EU law also divides service providers who are undertakings, and service providers who are not: non-undertaking service providers include consumer groups, environmental organisations, unions, and self-employed people who personally perform work. TFEU article 49 plainly envisages this, as it says the right of establishment ‘shall include the right to take up and pursue activities as selfemployed persons and to set up and manage undertakings’. On a correct construction of the Treaties (which is compatible with international law) self-employed people, who personally perform work, cannot be regarded as undertakings, or subject to competition law. This suggests that FNV and Wouters ought to be re-evaluated. This construction upholds the purpose of the law, which is to regulate powerful combinations of business, not combinations of labour with systematically unequal bargaining power. The result is that trade unions benefit from the right to provide services but they must never be classified as undertakings. They are the same as a consumer group that organises a boycott, or an environmental group that holds protests. To the extent that FNV suggested otherwise, it is manifestly incompatible with a plain reading of the Treaties. The better precedents from the Court have, in fact, recognised this. In Albany International BV v Stichting Bedrijfspensioenfonds Textielindustrie, the Court of Justice held that a collectively agreement, which set up a pension fund did not fall within the scope of what is now TFEU article 101.85 Although it was a multi-employer pension plan, it pursued a social objective. The pension fund itself, once running, could be regarded as having a dominant position, and it certainly engaged in an economic activity. But this was justified by serving a social purpose, underpinned by the value of solidarity. That decision was correct. A union that sells insurance services to its members could obviously be competing with private providers, and might have market power. But the very fact of its social objectives, and democratic structure, means it will seek to improve, not damage, the welfare of its members.

3.3

Unions’ Socio-Political Functions

Third, could acknowledgement of rights to provide services and establish undermine the social and political functions of unions? This concern is not merely philosophical, because it is true that the provision of services often falls within the ‘economic’ sphere. In Höfner and Elser v Macrotron GmbH, the Court of Justice held that the definition of an ‘undertaking’ in competition law is one ‘every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed’.86 But just because unions might provide services, it does not follow that their services are economic. Even if it competes with other entities, its social role

85 86

Albany International BV v Stichting Bedrijfspensioenfonds Textielindustrie (1999) C-67/96. Höfner and Elser v Macrotron GmbH (1991) C-41/90.

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eclipses any economic functions that it exercises. On the contrary, unions in their very essence are devoted to transforming the subordination of social life to economic life, and the services they provide are part of this. The reason unions must have freedom to establish and provide services, without unjustified restriction, is to enable the full democratisation of society in the twenty-first century.

4 Conclusion Trade unions ought to be explicitly recognised as having rights to provide services and establish in the European Union. Today, Europe faces serious crisis, where complacent thinking is no longer acceptable. The attempt of business to use economic rights against people who want to see a fair society has led to unprecedented growth in inequality, instability, rupture and extremism. Young people, who were promised a future of unity, are witnessing a frightening growth in far-right political parties. The evidence demonstrates that in Germany, France, Italy and the United Kingdom the existence of far-right movements is tied to economic insecurity. That insecurity begins with the attack on labour rights. White-collar professionals in depressed regions form the core of support, as they do for fascist-lite parties like the AfD, the Front National, Lega Nord, or UKIP.87 They always have done,88 because they feel like they have the most to lose. The only way to tackle them is through a positive agenda that succeeds in raising wages, guaranteeing full employment, and improving people’s well-being. The words in the European Treaties are not merely a programmatic agenda, but binding commitments that the Court of Justice must apply.

References Blair T (2000) Europe: building a superpower not a superstate. Guardian Breda T (2015) Firms’ rents, workers’ bargaining power and the union wage premium in France. Econ J 125:1616 Cook J (1879) Conscience with preludes on current events. ch I, 4 Davies ACL (2008) One step forward, two steps back? The Viking and Laval cases in the ECJ. Ind Law J 37(2):126 de Stefano V, Aloisi A (2018) Fundamental labour rights, platform work and human-rights protection of non-standard workers. In Bellace JR, Haar B (eds) Labour, business and human rights law. Also in Bocconi LSR Paper No. 3125866 Deakin S (2008) Regulatory competition in Europe after Laval. Cambridge Yearb Eur Legal Studies 10:581 Ewing KD (2005) The function of trade unions. Ind Law J 34:1

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e.g. Gorres et al. (2017) and Ford et al. (2012). See McGaughey (2016), p. 165.

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Ford R, Goodwin MJ, Cutts D (2012) Strategic Eurosceptics and polite xenophobes: support for the United Kingdom Independence Party (UKIP) in the 2009 European Parliament Elections. Eur J Polit Res 51(2):204 Forth J, Bryson A (2012) Trade Union membership and influence 1999–2010. TUC Freedland M, Prassl J (eds) (2014) Viking, Laval and beyond. Hart Gabriel PE, Schmitz S (2014) A longitudinal analysis of the union wage premium for US workers. Appl Econ Lett 21(7):487 Gorres A, Spies D, Kumlin S (2017) The electoral supporter base of the alternative for Germany. Swiss Polit Sci Rev Grossman E, Woll C (2011) The French debate over the Bolkestein directive. Comp Eur Polit 9 (3):344 Hayek FA (1960) The constitution of liberty. The University of Chicago Jevons WS (1888) Theory of political economy, 3rd edn. Macmillan & Co, London Joerges C, Rödl F (2009) Informal politics, formalised law and the ‘social deficit’ of European integration: reflections after the judgments of the ECJ in Viking and Laval. Eur Law J 15(1):1 Kahn-Freund O (1976) The impact of constitutions on labour law. Camb Law J 35(2):240 Kilpatrick C (2009) British jobs for British workers? UK Industrial Action and Free Movement of Services in EU Law. LSE Law, Society and Economy Working Papers 16/2009 Lecomte F (2011) Embedding employment rights in Europe. Columbia J Eur Law 17:1 Lindstrom N (2012) TTIP and Service Liberalization: Bolkestein returns? oefse.at McGaughey E (2016) The codetermination bargains: the history of German corporate and labour law. Columbia J Eur Law 23(1):135 McGaughey E (2018) Fascism-Lite in America (or the Social Ideal of Donald Trump). Br J Am Legal Stud 7(2):291 Mill JS (1848) Principles of political economy. Longmans, Green & Co, London Roosevelt FD (1944) Eleventh State of the Union Address Scharpf FW (2002) The European social model: coping with the challenges of diversity. J Common Mark Stud 40:645 Siegel LJ (1964) The unique bargaining relationship of the New York City Board of Education and the United Federation of Teachers. Ind Labor Relat Forum 1:1 Smith A (1776) The Wealth of Nations. Meuthen & Co. London Špidla V (2009) Statement in response to the strikes in the UK Syrpis P (2011) Reconciling economic freedoms and social rights - the potential of Commission v Germany (Case C-271/08, judgment of 15 July 2010). Ind Law J 40:222–229 Thompson B (2018) Budget cuts and low pay behind strike say UK criminal barristers. Financial Times Topham G (2016) Black-cab drivers’ Uber protest brings London traffic to a standstill. Guardian Van Cleynenbruegel P (2018) The freedom to receive trade union services: an additional stepping stone for enhancing worker protection within the EU internal market? Eur Labour Law J 9 (2):101 Webb S, Webb B (1926) Industrial democracy, 9th edn. Longmans Zurchner AJ (1935) The Hitler Referenda. Am Polit Sci Rev 29(1):91

Ewan McGaughey is a Senior Lecturer at King’s College, London. He holds degrees from King’s, the Humboldt Universität zu Berlin and the London School of Economics, and has taught at UCL. He is also a Research Associate at the University of Cambridge, Centre for Business Research. He was a Visiting Scholar at University of California, Berkeley in summer 2016. His doctoral research concerned participation in corporate governance, and is active in labour law, pension, institutional investment, and environmental law scholarship.

Tax Mergers Directive: Basic Conceptualisation Georgios Matsos

1 Introduction This paper, being part of a conference on the EU Cross-Border Mergers Directive,1 has as its main purpose to present the EU Tax Mergers Directive as part of both the substantial and the legal background behind the logic and the provisions of the Cross-Border Mergers Directive. Given that tax law issues are highly complicated and require a solid understanding of national tax law, of international tax law and of European tax law, this paper will present relevant issues in a way and to an extent that would be understandable not only by experts of tax law in both its international and its European perspective, but also and mainly by experts of commercial and company law. Taking into account that cross-border mergers pose many tax issues, which are relevant for the Cross-Border Mergers Directive, the Tax Mergers

1

The Directive that became known as the EU Cross-Border Mergers Directive has been Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (OJ L 310, 25.11.2005, pp. 1–9). This Directive has been repealed by Articles 118–134 of Directive 2017/1132/EU of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (OJ L 169, 30.6.2017, pp. 95–102). Although technically no “Cross-Borders Mergers Directive” exists anymore, this paper will refer, for reasons of brevity, to the provisions in force about the cross-border mergers as “Cross-Border Mergers Directive”. This happens not only because the title of the conference refers directly to “Cross-Border Mergers Directive”, but also because in the consciousness of the European academic community this set of EU-law provisions is more easily understandable as “Cross-Border Mergers Directive”. G. Matsos (*) International Hellenic University, School of Economics, Business Administration and Legal Studies, Thessaloniki, Greece Matsos & Associates Law Office, Thessaloniki, Greece e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_10

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Directive2 will have to be presented in its basic conceptualisation and in its aspects that serve as background of the company law Cross-Border Mergers Directive. This paper will, thus, consciously abstain from presenting current issues of cross-border mergers.

2 Hidden Values and Capital Gains as Major Tax Issue in Mergers 2.1

Generation of Hidden Values and of Capital Gains

As long as a company runs its active business, hidden capital gains are generated. In order to understand it is important to have an elementary overview over their mechanism and function. Taxation of companies but also commercial accounting is based on the concept of a constant calculation of the variation of assets and liabilities. A company has profit not when it receives money, but when an operation results to assets of higher value. Payments (received or disbursed) can very often be of neutral effect regarding profits, because they reflect, for instance, procurement of another asset of the same value or extinction of an obligation. Assets are usually initially booked in accounting records at the cost of their acquisition or of their internal production. When for any reason—e.g. because of a transaction or of a physical disaster—they stop being owned by the company, then they are deleted from the company’s books and accounting records. This process of acquisition (or internal production) and alienation of assets is the basis of profit creation. When a company purchases commodities of value 100 paid in cash, this operation is neutral regarding profit variation: cash in value of 100 exits the company and merchandise in value of 100 enters the company. The company is, after the purchase, neither richer nor poorer: before the purchase it had 100 in cash and after the purchase it has 100 in commodities. If now the company sells said commodities at a price of 300, then assets (i.e. the commodities) booked at a value of 100 exit the company and a new asset (cash or even a claim—it makes no difference for purposes of profit generation) of value 300 enters the company: the new asset (cash or claim)

2

Today, Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States (OJ L 310/34, 25.11.2009). The first Directive that was known as Tax Mergers Directive was Council Directive 90/434/EEC of 23 July 1990 (OJ L 225, 20.8.1990), which has been replaced by Directive 2009/133/EC and repealed by Art. 17 of the latter. As both Directives have similar structure, a referral to the “Tax Mergers Directive” or simply to the “Directive” will refer mainly to Directive 2009/133/EC, but will notionally include also Directive 90/434/EEC.

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has a value higher than the old asset (commodities) and the difference of value is the profit from the operation. As long as assets are under a company’s ownership, their value may vary for multiple reasons—offer and demand, fashion, erosion, inflation etc. Such variation of value is NOT always recorded. A major example is the depreciation of fixed assets. Fixed assets (tangible and intangible) are no commodities and they are not supposed to exit the company, which most tax systems provide according to rates predetermined in their tax laws. Such depreciation is usually supposed to reflect the physical erosion of tangible assets or a deemed loss of value of intangible assets. As their rates are predetermined in the tax laws, they rarely reflect the true degree of erosion or of loss of value of the assets concerned. Thus, if mechanical equipment has a depreciation rate of e.g. 10% (i.e. its lifetime is deemed in the law to last 10 years), then after e.g. 7 years, some mechanical equipment purchased at a value of e.g. 1000 will have a book value of 300 (depreciated at 10% per year for 7 years). Such book value will rarely coincide with the true market value of the asset. The latter might be higher or lower. If now the company sells said mechanical equipment at a price of 450, then the operation will cause an asset (the equipment) in value of 300 to exit company ownership and an asset in value of 450 (cash or claim) to begin company ownership and be accordingly booked in the company accounting records. Obviously the company will have, from such an operation, a profit of 150. But what if the company does not sell the mechanical equipment, and instead the company itself is sold as a whole? The (knowledgeable) company purchaser will know that there is mechanical equipment there with value higher than the book value. In such a situation the company seller should request and succeed in receiving a price for the company, increased by the (hidden) increased value of the equipment, which is sold together with the entire company. Such hidden value is economically and legally there, but is not recorded in the company books. The revelation of said hidden value and of all hidden values generate what is known in accounting and taxation as capital gains. Capital gains can be generated not only by depreciation, but also by many other factors. The (initially non-bookable before a transaction reveals it) goodwill of a company is a typical source of hidden values and of capital gains. The increase in the value of immovable property is another major source of capital gains. Patents and other intellectual property assets are by definition never initially booked in their real value; as a matter of fact most valuable intangibles are undervalued in company accounting records, for the major reason that a reliable evaluation is only rarely possible. Thus, very often they reflect hidden values and consequently they generate capital gains. As illustrated through the example above with the mechanical equipment sold together with the entire company, hidden values are disclosed in two ways. One is to disclose the hidden value in individual transactions involving just these assets that incorporate hidden values. The other is to have them disclosed indirectly through a transaction involving the company in its entirety, also including the assets bearing hidden values. In this latter case the hidden values are in principle not recorded in the

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accounting books of the company itself, but rather by the purchaser, who books a purchase of a company in a value higher than its entire book value. It is exactly this latter case that is relevant for mergers. When two or more companies merge, they will naturally proceed in an evaluation process, in order to assess how high the participation of each of the merging companies in the absorbing company or in the company-to-be-created will be. During this evaluation process, a knowledgeable evaluator will naturally take into account hidden values as well. In this way hidden values will be reflected into the final merger agreement and, thus, will be formally revealed and disclosed.

2.2

Inclusion of Capital Gains Caused by Mergers in Taxable Base?

The disclosure of hidden values is disclosure in all aspects that are provided by law. Setting apart the often complicated relationship between commercial accounting and tax accounting law,3 such aspects usually include taxation. This means that the recording of new values in the taxpayer’s formal ownership simply and merely leads to the taxation of such ownership. If the taxpayer is a company, then taxation of such new values is more obvious, as they will simply be reflected in the taxpayer’s annual balance sheet. If the taxpayer is an individual, then specific law provisions for the taxation of capital gains have to be applied, in order for the capital gains to be taxed. Supposing that a company has a book value of 1000 and after a merger with another company, the shareholders of the former company acquire shares in value of 1300. This would mean that the merger has led to disclosure of hidden values that would be worth 300. Τhey would then have to be taxed for such values—either because the profit in the balance sheet of the shareholders would simply be increased by 300, or because domestic legislation provides for the taxation of capital gains in the form of new shares of higher value.4 Taxation of capital gains arising from mergers and from other similar company transformations has a big disadvantage for the taxpayers compared to taxation of usual business profits arising from sales within the framework of the core business activity of an undertaking: shareholders of the merging companies usually receive either inadequate cash or none at all in order to be able to settle any tax burden

3 Especially German scholars produce highly sophisticated analyses for the relationship between commercial accounting law and tax accounting law, within the framework of the so-called in German “ Maßgeblichkeitsprinzip”. Instead of newer discussions and in order to understand the fundaments of such concepts, cf. Knobbe-Keuk (1993), pp. 17–33. 4 Cf. in Greek tax law the provision of Art. 42 (2) of Income Tax Code.

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imposed on capital gains arising from such operations.5 They may receive higher values (if of course there are indeed hidden values disclosed through the merger operation), but they do not receive cash from such higher values. If they need to find such cash from the merger operation, they would have to alienate a part of the shares obtained after the merger. However, imposing such an indirect obligation to alienate property in order to pay taxes related with such property is politically and constitutionally hard to defend: mergers as such do not reflect an immediate increase of a shareholder’s ability to pay. Thus, most countries have today a set of domestic law provisions exempting from taxation capital gains arising from mergers. On a technical level, such exemption may be regulated in various ways,6 but the final result is always that capital gains, which otherwise might have been taxed, remain untaxed. As long as a merger stays within domestic borders, it is difficult to imagine possibilities for large-scale tax avoidance, unwanted by the tax authorities. Even in the case where there were individual possibilities for unwanted tax avoidance through a merger under certain jurisdiction, the tax authorities would always be in a position to counter such unwanted tax avoidance simply by passing the necessary law amendments through the Parliament. The situation, however, becomes totally different if a merger crosses borders. Crossing borders would mean that taxable assets with hidden values might simply change jurisdiction in a way that they finally become subject to taxation in this other jurisdiction, by excluding jurisdiction in the country where the hidden values would have been otherwise disclosed and taxed. Correct tax planning may ensure that, finally, hidden values will be disclosed in a low tax jurisdiction. At this point, readers who are not familiar with international tax law should bear in mind how bilateral Agreements on the Avoidance of Double Taxation (Double Tax Conventions—DTCs) distribute tax jurisdiction between most countries. DTCs are widely based on a (formally non-obligatory, but practically having a soft law effect) Model Convention, which is issued and regularly updated by the Organisation for Economic Co-operation and Development (OECD). As the text of most DTCs follow this Model, the main rules distributing international tax jurisdiction are quasi harmonised not only on a European, but also on a global level.

5 The Tax Mergers Directive itself provides in its Art. 2(a)(i) and (ii), Art. 2(b), Art. 2(c) and Art 2 (e) that it is applicable only if payments in cash do not exceed 10% of the value of the operation. Even this limited amount of cash can be included in the taxable base of the shareholders, according to Art. 8 (9) of the Directive. 6 Cf. the case of Greece. The Greek legislation offers two distinct and different tax regimes for exempting mergers from which the taxpayer may choose. On one hand, Legislative Decree No 1297/1972 provides directly for exemption of capital gains arising because of a merger. On the other hand, Law No 2166/1993 provides for a simple and straightforward unification of the balance sheets of the merging companies. The latter method does not lead to any determination and to any formal disclosure of hidden values and of capital gains at all. Although the latter method is seemingly a different one, the underlying idea is always that hidden capital gains will not be taxed.

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Double Tax Conventions are more important than their name leads to believe: by seemingly dealing “only” with the technical phenomenon of double taxation, DTCs provide rules about which State will tax and which State will not tax. In some cases they even provide limits regarding how much each State may tax. By doing so, a DTC not only removes double taxation, but it mainly sets the tax borders between two jurisdictions. It is the applicable DTC that says when a taxpayer will pay taxes in one country and when the same taxpayer will pay taxes for the same operation in another country. Taxation of capital gains is regulated in Art. 13 of the OECD Model Tax Convention. By shortcutting a more detailed analysis of the entire Art. 13,7 a set of provisions which is important for the taxation of cross-border mergers, a non-expert in international tax law should bear in mind only the catch-all provision of Art. 13 (5) of the OECD-Model, which reads: Gains from the alienation of any property, other than referred to in paragraphs 1, 2, 3 and 4, shall be taxable only in the Contracting State of which the alienator is a resident.

In a few words, this provisions stipulates that capital gains other than those from immovable property (par. 1), assets that are part of a permanent establishment (par. 2), ships and aircraft (par. 3) and shares in real estate companies (par. 4), are taxed only in the State of Residence of the person to whom capital gains are attributed. Thus, if an asset bearing hidden capital gains changes ownership to a resident of a low tax country through a cross-border merger, then the jurisdiction having the permission to tax capital gains from such hidden values will also be changed. As already mentioned above, assets typically bearing hidden values are patents and other intangibles. A patent owned by a company situated in a high-tax jurisdiction without permanent establishment in its country of residence, will have its tax jurisdiction changed if the owning company merges into a company situated in a low-tax jurisdiction. If the latter company then sells the patent (which might have perfectly been the original and only aim of the merger), then all profits from this operation will be taxed in the low tax jurisdiction where the absorbing company is a resident. There are many other methods a cross-border merger could use in practice in order to relocate future capital gains from one taxing jurisdiction to another. Unlike other current profits, capital gains provide the advantage for the taxpayer in that they are exceptional and usually well-known before they occur, and therefore the taxpayer usually has the time and the means to organise their efficient relocation before effective taxation takes place. Cautious tax planning may even lead to circumvent the provisions of the OECD Model Tax Convention in Art. 13 (1), (2), (3) and (4), which aim to prevent tax avoidance, without violating them. Such possibility of abusing cross-border mergers in order to move taxation of capital gains from one jurisdiction to another is the main and most complicated issue,

7

See the detailed analysis and the sources of Reimer (2015), pp. 1033–1084.

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which has made tax authorities over decades stay very reluctant towards permitting cross-border mergers. Today there are various tools in the arsenal of tax authorities, aiming to counter such abusive practices. While cross-border mergers have been a reality in EU context since 2005, the limits between abusive and non-abusive practices are still not clear at all, neither in theory nor in practice. This remains until today the core area of evolutions in tax law of cross-border mergers.8

3 World Income Principle and Dividends Aside from taxation of capital gains being the most delicate and sophisticated tax issue in matters of cross-border mergers, there are also other important tax issues affecting cross-border mergers, which are less discussed among scholars and less controversial in the practice of taxpayers and of tax authorities. Although less discussed and less controversial, such other issues are of higher importance for general tax law than taxation of capital gains: cross-border mergers affect namely both the “general” taxation of business profits of a company, as well as the taxation of profit distribution, especially through dividends. The reason both issues are less discussed and are less controversial is, as will be shown below, that there are other, less complicated means to achieve (real or artificial) relocation of activities and relocation of the distribution of profits, so that cross-border mergers do not pose in principle any specific problems, compared to other ways of relocating business profits dividends.

3.1

Impact of the Unwritten World Income Principle: Business Profits

Two basic assumptions for international tax law which are nowhere written in international law, but are at the same time pillars of jurisprudence in international taxation are (a) that quasi all countries will use residence as one of their major links to define that a taxpayer is subject to tax in their jurisdiction and (b) that residents will have in principle to pay income or corporate tax9 for the entirety of their world income.

8

Cf. below, Sects. 4.3 and 4.4. In order to avoid confusion, it has to be clarified that “corporate tax” is the income tax imposed on the profits of a corporation. Often, when tax experts refer to “income tax”, they also mean and include corporate tax. In some countries corporate tax is a tax formally different than income tax, while in other countries (like Greece), there is no distinct corporate tax and both taxes are formally named “income tax”.

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The unwritten but very consistent uniformity of this global legislative practice helps international tax experts in their capacities as scholars, civil servants or practitioners to use a common international language to understand international tax law issues in a globally similar manner. As a matter of fact the so-called “World Income Principle” for residents is indirectly written only in the OECD Model Tax Convention and, consequently, in the bilateral tax treaties that have been concluded following the OECD Model (quasi all of them). The structure of DTCs rules attributing income can be seen at the example of Art. 7(1)(1) of the OECD Model Tax Convention, which reads as follows: Profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

In the case that, in the example of Art. 7(1)(1) of the OECD Model Tax Convention, a permanent establishment is indeed situated in “the other Contracting State” and generates business profits, then the Source State has taxing rights and taxation is “at the source” (source principle, opposed to world income principle). A sophisticated set of rules contained among others in Article 23 (23A or 23B) of the OECD Model Tax Convention regulates taxation in the Source State with the necessary unambiguity. What happens now when a cross-border merger occurs? Assuming that, before the merger, all merging companies have business activity through offices, branches, production plants etc. only on the territory of their corporate seat, then at the end of the merger process there will be only one legal entity—one taxpayer—which will have business profits in all countries that used to host the absorbed companies before the merger. Assuming that the legal alteration which occurred through the merger is not followed by any factual alteration of activities, then the State of Residence will have attributed taxation of business profits arising within its own territory. All other activities will be exercised through permanent establishments situated in the territory of the country, where each absorbed company had its seat. According to the full set of rules contained in Art. 7 OECD Model Tax Convention, this income will be taxed in the State of Source, i.e. in the countries where each absorbed company had its seat before the merger. As a result, following the merger each country will have in principle the same taxing powers on the overall income of the merged companies, as they did before the merger: they will tax each of them on the part of the overall income that they were taxing before the merger. The formal difference between taxing income under individual companies before the merger and under permanent establishments after the merger, does not significantly alter10 the tax burden and, most importantly, it

10 As a matter of fact both DTCs as well as domestic provisions on the relief of international double taxation use not only exemption, in order to avoid double taxation, but also the so-called “credit method”. The latter means that the taxpayer is allowed to deduct in his/her State of Residence the amount of tax paid in the Source State, but only to the extent that such tax credit does not exceed the

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does not cause as such any possibility for relocation of taxable profits from a high to a low tax jurisdiction. Certainly, if the seat of the absorbing company is in a low tax jurisdiction, then sooner or later the income that will attributed to the head office of the unified company will tend to increase, while the income of the (“less important than the headquarters”) permanent establishments will tend to decrease. But this is a process that can occur with or without a merger. A group of companies can create new companies in low tax jurisdictions and start relocating activities to low tax jurisdictions, without needing a cross-border merger for this. A cross-border merger could make this process easier, but it would differentiate taxation on a structural level.

3.2

Distribution of Profits from One Company to Another

The orthodox way to distribute a company’s income to its shareholders is the formal distribution of such income in the form of dividends. Dividends are a peculiar and particular form of income, since in cross-border operations their nature causes not only double, but as a matter of fact multiple taxation. In the so-called “classical” dividends taxation scheme, where each taxpayer has to pay for their income, a subsidiary distributing dividends to its parent company, which is situated in another Member State, would cause not double, but triple taxation: first level is the corporate tax that the subsidiary pays in its State of Residence, second level is the income tax that the foreign shareholder has to pay in the Source State of its income (which is the Residence State of the distributing subsidiary) and third level would be the corporate tax that the parent company should pay in its State of Residence for the same dividends. If the parent company wants to distribute to its own shareholders, then further levels of taxation will occur, eroding considerably the final receivable income of the shareholder. Why then would a company favour cross-border activity, if tax burden becomes so much higher? Art. 10 of the OECD Model Tax Convention deals with the issue only partially. It deals namely with abolishing double taxation of dividends themselves, which can be taxed in the Source State at a rate of 5% or 15%, while the State of Residence of the payee has to allow deduction from its own tax (i.e., offer a so-called “tax credit” to the payer) of the tax paid in the State of Source. The OECD Model Tax Convention does not provide for any relief of the corporate tax paid by the subsidiary in its own State of Residence (and State of Source of the dividends).

amount of tax that would have to be paid in the State of Residence. If this is the case, then double taxation is in practice not fully removed. Nonetheless, both methods (exemption and credit method) are generally considered to be more or less equivalent.

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This situation has been remedied on an EU level by Directive 90/435/EEC,11 which provided for a full set of rules tending to abolish multiple taxation of dividends. This so-called “parent-subsidiary Directive” set the following major rules: (a) Taxation of dividends in the State of their source (State of Residence of the subsidiary) would be thoroughly abolished. And: (b) The State of Residence of the parent company has to either exempt dividends from taxation, or at least allow deduction of the corporate tax paid by the subsidiary to its own State of Residence (and Source State of the dividends). In this way, the only level of taxation that survives becomes the corporate tax paid by the subsidiary itself. By setting these rules at the same time with the first version of the Tax Mergers Directive,12 the European Communities had created a framework allowing something more than tax neutrality of foreign investments: the possibility to preserve low taxation for parent and/or subsidiary companies in a cross-border scheme. EU-wide tax planning became more interesting and more attractive. In such schemes, crossborder mergers could help to create the desired formations in a more efficient way. However, even in this situation, cross-border mergers would be only one tool among several ones aiming to execute a tax planning based on the idea of more than one companies. Though more useful than in the case of business profits directly produced by a foreign business entity (Art. 7 OECD Model), the “moving around” of dividends can very well occur even without cross-border mergers.

3.3

Interim Conclusion: Only Relocation of Company Seat Matters

Direct business activity of a company and activity through a subsidiary company are only assisted by cross-border mergers. They do not have the specific capacity that the capital gains phenomenon contains in itself: a cross-border merger with an indirect but still true relocation of a taxpayer’s seat also triggers at the same time under certain circumstances relocation of taxes, which without the cross-border merger should have been paid in the original State of Residence, where the absorbed company had its corporate seat before the merger. What is finally really significant is the relocation of the corporate seat and, consequently, of the place where a company will have to pay income/corporate tax for its world income, benefitting at the same time from the exemptions that each tax treaty based on the OECD Model would guarantee on its cross-border transactions.

11

Now repealed by Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ L 345/8, 29.12.2011). 12 Directive 90/434/EC of 23 July 1990. Cf. fn. No 2.

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Having this in mind, the European Commission has accompanied its recent proposal for amending Directive 2017/1132/EU by adding the possibility of a true relocation of existing companies,13 with an explicit tax clause, namely Art. 86c (3), which reads as follows: Member States shall ensure that the competent authority of the departure Member State shall not authorise the cross-border conversion where it determines, after an examination of the specific case and having regard to all relevant facts and circumstances, that it constitutes an artificial arrangement aimed at obtaining undue tax advantages or at unduly prejudicing the legal or contractual rights of employees, creditors or minority members.

This approach is part of the wider anti-BEPS programme initiated in 2013 by the OECD. The abbreviation “BEPS” stands for “Base Erosion and Profit Shifting”, in the sense that the programme aims to combat such (taxable) base erosion and profit shifting to other countries, if it is performed by taxpayers in order for them to acquire undue tax benefits. It is impressive that the proposed provision of Art. 86c (3) does not only allow Member States to prevent cross-border conversions aiming to obtain undue tax advantages, but also imposes on Member States such anti-abuse behaviour. While such an approach only confirms that the BEPS-programme only aims to impose anti-avoidance rules on governments and countries not really willing to combat tax avoidance, it is characteristic that the Commission has nowadays become rather willing to sacrifice the freedom of establishment in Europe in favour of antitax-avoidance considerations: the draft provision clearly obliges Member States to ensure avoidance of tax avoidance: Member States shall ensure that [. . .] Member State shall not authorise [. . .].

An identical provision on cross-border divisions may be found in draft Article 160d (3), where again “undue tax advantages” have to be avoided for the division to be allowed by the Member State. It goes without saying that the purposes of EU law are being heavily distorted in this way: EU is primarily supposed to ensure the effective operation of an internal market. Freedom of establishment forms integral part of such internal market. Of course, the legitimate vital interests of the Member States regarding taxation have to be preserved. But why does the Commission proposal oblige Member States to preserve their own interests? Don’t they know to do this? All that EU has to do is to allow them to preserve such interests. Member States’ obligations directly contradicting the achievement of an internal market cannot form part of secondary EU law.

“Cross-border conversion” as formally mentioned in Commission Document No COM(2018) 241 final of 25 April 2018, “Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions”.

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4 Important Individual Aspects of the Directive 4.1

General Framework

According to the background analysed above, the Tax Mergers Directive focuses mainly on capital gains. Its main provision (Article 4) namely provides in paragraph 1 that: A merger, division or partial division shall not give rise to any taxation of capital gains calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes.

This is the main substantial provision of the Directive: taxation of capital gains, in the sense of the difference between real values and book values, calculated because of a merger operation, is forbidden. Confirming the ability to pay principle that is reflected in the exemption of mergers operations and in order to avoid applicability of the Tax Mergers Directive on acquisitions, the Directive clarifies in all relevant definitions that an operation cannot be considered a merger, a division or a partial division, if cash payments related to the operation exceed 10% of the nominal value of the securities exchanged.14 To this end, it is interesting that Art. 8 (5) provided that the provisions of the Directive shall not prevent a Member State from taking into account when taxing shareholders any cash payment that may be made on the merger, division, partial division or exchange of shares.

Thus, even to the limited extent of 10% on the value of the operation that cash can be paid according to the definitions of the Directive, the provision of Art. 8 (5) still allows the Member States to tax capital gains reflected in any such cash payment.

4.2

Anti-Abuse: Phase I—No Cross-Border Mergers Directive

The European Economic Community had introduced the Tax Mergers Directive among the first measures of secondary legislation ever voted in the history of the European integration in 1990.15 However, given the extraordinary, dynamic consequences that a cross-border merger could have regarding the territorial affiliation of hidden values to a tax jurisdiction and the possibility to move them from a high to a low tax country, 14

Cf. the provisions of Art. 2(a)(i) and (ii), of Art. 2(b), of Art. 2(c) and of Art 2(e) of the Directive. At that time, Directive 90/434/EEC, together with the so-called Parent-Subsidiary Directive (No 94/435/EEC) and the Arbitration Convention (No 90/436/EEC). 15

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Member States were reluctant to really apply in practice the Tax Mergers Directive. What they did, in order to avoid applicability of the Directive, was to avoid introducing a possibility for cross-border mergers at all. In this way, if a Member State wanted to offer a possibility of cross-border mergers in its domestic law, it was free to do so. However, there was no such obligation from the part of secondary EC law and, as an effect, most EC/EU Member States simply did not allow cross-border mergers in their domestic company law.16 And although the Directive was still applicable17 on operations of transfer of branches of a foreign entity into a domestic one,18 and on the exchange of shares,19 without need for a legal basis on crossborder mergers stricto sensu, the Directive could not apply on the latter, because they simply could not take place. EU Member States were showing in this way and for a long time how reluctant they were to accept the full tax consequences of cross-border mergers. Directive 2005/56/EC (“Cross-Border Mergers Directive”),20 came around only 15 years after Directive 90/434/EEC and only a few weeks before the European Court of Justice would impose to Member States the obligation to accept cross-border mergers already on the basis of the EC Treaty. One might wonder how the EEC had voted in 1990 the Tax Mergers Directive only to pretend that there is one, while there was no Cross-Border Mergers Directive. The answer is probably to seek in the political correctness of the early 1990s: in the time that the Single European Act had led Europe to a flourishing legislative activity on all areas of economic law, direct taxation was falling short of regulatory fields that would be acceptable by the conflicting interests of Member States. In order then to show that there was some production of regulatory work also in the field of direct taxation, the Council adopted a package of two Directives and one Convention, among which one of the two Directives was not applicable for its biggest and most essential part. This is good evidence of how underdeveloped the European law of direct taxation has been, and to a big extent still is.

16

According to non-official reports of the early 1990s, only low tax jurisdiction Luxembourg among 12 EC/EU Member States of that time was allowing cross-border mergers in its domestic company law. 17 See Knobbe-Keuk (1993), pp. 838–842 and 929–934. 18 Cf. today Art. 2(d) of Directive 2009/133/EC, where the technical term “transfer of assets” is used to describe the transfer of a branch. 19 Cf. today Art. 2(e) of Directive 2009/133/ED. 20 See above, footnote no 1.

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Anti-Abuse: Phase II—Tax Deferral

The Tax Mergers Directive contained since its first day a very necessary anti-abuse clause, which was supposed to counter the abuse of cross-border mergers in order to obtain undue tax advantages. Today, the anti-abuse clause reads as follows (Art. 15 (1)(a) of the Directive): A Member State may refuse to apply or withdraw the benefit of all or any part of the provisions of Articles 4 to 14 where it appears that one of the operations referred to in Article 1: (a) has as its principal objective or as one of its principal objectives tax evasion or tax avoidance; the fact that the operation is not carried out for valid commercial reasons such as the restructuring or rationalisation of the activities of the companies participating in the operation may constitute a presumption that the operation has tax evasion or tax avoidance as its principal objective or as one of its principal objectives; (b) [. . .].

Although wording of the anti-abuse clause is general and refers to all types of tax avoidance and tax evasion, it is clear that, as it was shown above,21 the main problem of tax avoidance and even tax evasion regarding cross-border mergers will always be the potential relocation of tax jurisdiction for capital gains. For many years after the Tax Mergers Directive was firstly introduced in 1990, neither the Member States nor the European Institutions really knew how to apply the Tax Mergers Directive while at the same time preventing the inherent (due to Art. 13 (5) of the OECD Model Tax Convention)22 possibility of a cross-border merger to achieve quasi automatic relocation of the taxing jurisdiction of hidden capital gains, at least for certain types of assets. This was reflected also in the first case brought before the Court of Justice of the European Communities regarding Tax Mergers Directive (case “Leur-Bloem”23). The Court affirmed the applicability of the antiabuse clause in cases that tax avoidance would be the primary or one of the primary objectives of the operation, but on a practical level it requested that the competent national authorities cannot confine themselves to applying predetermined general criteria but must subject each particular case to a general examination.24

No matter how rational the position of the Court might sound, the same position was problematic from two major points of view: (a) tax authorities would need to devote auditing resources on each individual merger operation and (b) taxpayers’ uncertainty would render the use of the benefits of the Directive non-useful in practice. Today the abuse problems of cross-border mergers as well as of other operations similarly susceptible of abuse are widely resolved by the concept of tax deferral. The

21

Cf. above, Sect. 3.3. Cf. above, Sect. 2.2. 23 Case C-28/95, Judgment of 17 July 1997, ECR 1997, p. I-4161. The case was about a domestic operation, because the Netherlands had transposed the Directive in a way to be applicable also on purely domestic situations. 24 Paragraph 41, op.cit. (fn. 23). 22

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Directive itself refers to this concept in its Preamble, in order to pave the way for Member States to transpose the Directive using this concept, as the most appropriate one for combining applicability of the Directive and countering of abusive operations. The pertinent part of the Directive Preamble25 defines tax deferral as follows: The system of deferral of the taxation of the capital gains relating to the assets transferred until their actual disposal, applied to such of those assets as are transferred to that permanent establishment, permits exemption from taxation of the corresponding capital gains, while at the same time ensuring their ultimate taxation by the Member State of the transferring company at the date of their disposal.

In this way, the Member State that might be in danger of losing future taxation of hidden capital gains does not simply exempt capital gains disclosed due to the crossborder merger, but also defines taxation and at the same time defers taxation for the time that true realisation of capital gains will bring to the taxpayer the necessary ability to pay. This would include mainly the alienation of said assets for a price that a third party would pay (i.e. the actual realisation of profits).26

4.4

Anti-Abuse: Phase III—BEPS Programme?

The OECD BEPS-programme has already been referred to above with regard to the amendments of the Cross-Border Mergers Directive that the European Commission has proposed on 25 April 2018. The proposed amendments also have important tax parameters in the area of anti-abuse provisions.27 The BEPS-programme itself is a complicated mixture of policy and laws, which has brought much turbulence in global tax law. Final applicability of the outcome of the OECD work remains uncertain, while scepticism towards its means and even towards its goals grows. In the area of intra-European cross-border mergers, BEPS principles and future rules do not seem to have much room available for applicability. As long as Member States apply the idea of tax deferral, their legitimate interests are preserved together with the unimpeded application of the Mergers and of the Tax Mergers Directive. If the Commission proposal to impose on Member States an obligation to “ensure” that there will be no tax avoidance due to a cross-border transformation 25

Paragraph 7 of the Preamble of Directive 2009/133/EC. The idea of tax deferral for such operations was suggested as a general solution for the balance between applicability and anti-abuse by Matsos (2001), pp. 47–51. As the ECJ judgment of 7 September 2006 in case N, C-470/04 shows, the idea of tax deferral was not unknown in domestic laws. However, until 2006 and the case N the idea of tax deferral had not been brought forward as a solution for the type of problems generated by cross-border operations that lead to a change of jurisdiction for the taxation of capital gains. Today, most Member States use tax deferral in order to ensure both applicability of the internal market principles and of the anti-abuse clauses. 27 Cf. above, Sect. 3.3. 26

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becomes successful, one can easily imagine how this will operate in practice: exclusion of tax avoidance in a cross-border transformation will be very difficult to be affirmed by the tax authorities of any Member State. Such ideas might, thus, endanger the applicability of company transformation tools in total and should be reconsidered.

5 Conclusions It is true that, as cross-border mergers offer financially interesting tools for relocating hidden values for one taxing jurisdiction to another, tax avoidance is often a good reason to consider a cross-border merger. EU Member States have been, for this exact reason, very reluctant to allow intra-EU cross-border mergers, although the Tax Mergers Directive had already existed for 15 years before the Cross-Border Mergers Directive was issued. The truth was that, until that time, the EU did not really know how to apply the Tax Mergers Directive without excessive controls and without allowing abuse of cross-border mergers for undue tax benefits. As soon as the idea of tax deferral was introduced in European tax law, the possibilities of abuse have been considerably reduced to the extent that the area of cross-border mergers today does not really need the international anti-BEPS project in order to have the legitimate financial interests of EU Member States protected. Cross-border mergers can, thus, remain a tool for efficient restructuring and for legitimate exercise of the freedom of establishment, without unnecessary tax concerns either for the merging companies or for the governments.

References Knobbe-Keuk B (1993) Bilanz- und Unternehmenssteuerrecht, 9th edn. Dr Otto Schmidt, Cologne Matsos G (2001) Investitionen deutscher Steuersubjekte in griechische Kapitalgesellschaften. PCO-Verlag, Bayreuth Reimer E (2015) Article 13 OECD-MTC. In: Reimer E, Rust A (eds) Klaus Vogel on double taxation conventions, 4th edn. Wolters Kluwer, Alphen aan den Rijn, pp 1033–1084

Georgios Matsos lectures domestic and international tax law at the Aristotle University of Thessaloniki and at the International Hellenic University, Thessaloniki. He is author of many publications on tax law, on accounting law and on public finances. He has been an invited speaker in many international and domestic conferences and also a guest lecturer at many international Universities. He is head of Matsos & Associates Law Office, Thessaloniki.

Procedural Harmonisation in Cross-Border Mergers Michael Kyriakides and Fryni Fournari

1 Where Have We Gone So Far Recognising the inevitability and desirability of mergers within the European Union, it was only rational that the European Union would have implemented a legislative instrument that would enable the cross border mergers of limited liability companies within the European Union. Directive 2005/56/EC on Cross-Border Mergers, which has now been codified as part of the EU Directive 2017/1132 of 14 June 2017 relating to certain aspects of company law (the Directive) has suitably served this purpose for the last 13 years. Empirical studies have shown that the Directive has aided the free flow of capital and labour within the European Economic Area (EEA), which worked as a catalyst for increasing the prospect of external growth and has resulted in a notable corporate reorganization within the European Union.1 Research has also demonstrated that the number of limited liability companies merging has dramatically increased as a consequence of the various cross-border merger related decisions of the European Court of Justice as well as the enactment of the Directive.2 Notwithstanding that it has been described as a “a minimum harmonisation legislative instrument”,3 given the absence of any endeavour of the European Legislature to unify national laws on cross-border mergers,4 there is undoubtedly a general 1

Study on the Application of the Cross-Border Mergers Directive (2013), p. 968. Cross-border merger numbers stood at 132 in 2008 and reached 361 in 2012, see Study on the Application of the Cross-Border Mergers Directive (2013), p. 5 and 24. At the same time, domestic mergers within the European Union have significantly decreased in 2008–2012, ibid at 38. 3 EU regulatory approaches to cross-border mergers: exercising the right of establishment (2011), p. 94. 4 The New Cross-border Merger Directive (2007), p. 596. 2

M. Kyriakides (*) · F. Fournari Corporate Law Department, Harris Kyriakides LLC, Larnaca, Cyprus e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_11

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consensus that the Directive has successfully filled an important gap in the corporate legal framework in the European Union. Nonetheless, it is also common ground among legal professionals that there are issues which have not been addressed by the Directive and undermine the efficiency of the overall venture. It has been well established through various studies (and indeed demonstrated in everyday corporate practice) that there are examples where EU Member States have approached cross border merger procedures in a divergent manner and that there are conflicting stances or gaps within the legislation of EU Member States on several matters of importance, which, in turn, render the EU crossmerger procedure an adventure with uncertainties and complications.5 In this article, we argue that (a) the lack of harmonisation of procedural provisions is an important source of problems and complications and, in general, undermines the efficient implementation of the Directive6; and (b) that, by way of exception to the generally cautious approach of the European Union in the harmonisation of procedural rules, this kind of EU instrument, characterised by a cross-border element and generally distinct from the fundamental differences across legal systems in contentious litigation, could vastly benefit from harmonisation of procedural rules in the form of a specially designed civil procedure code applying solely for crossborder mergers.7

2 The Lack of a Procedural Framework8 as a Source of Complications We consider that the Directive was not promulgated as a self-standing legislative instrument and it failed to introduce a respective procedural framework that would facilitate the efficient and straightforward implementation of its rules. We offer below some indicative procedural complications which practitioners have encountered since the implementation of the Directive. These examples highlight the complexities that arise as a result of the lack of a procedural framework.

2.1

Procedural Timetable

There are substantial differences in EU Courts in the timeframe within which an application can be put before them for them to rule upon it. This may result in

5

Study on the Application of the Cross-Border Mergers Directive (2013), p. 10. See Sect. 2 below. 7 See Sect. 3 below. 8 References to “procedural framework” or “procedural rules” are made interchangeably and denote civil procedural rules that describe and regulate the civil process under which a matter is brought before and adjudicated upon by a Court. 6

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problems in a cross-border merger, given that one Court may deal with the application within 4 weeks while another Court may need 6 months to do so. The overall framework would benefit from timetable provisions, requiring Courts to deal with the application within a specific maximum timeframe. The time span envisaged for the full completion of a cross border merger cannot be verified with certainty as much will depend on the efficiency and work load of the competent authorities and the Court system in the various jurisdictions.

2.2

Service of Proceedings

There are substantial differences in EU Courts in relation to the persons who need to be served with an application regarding the issuance of a pre-merger certificate or regarding the completion of the cross-border merger procedure under the Directive. For instance, in Cyprus it is imperative that the Registrar of Companies and Official Receiver is served with the proceedings, although it rarely appears before the Court. The overall framework would benefit from specific provisions on which persons need to be served with any proceedings filed before the Court in relation to the Directive.

2.3

National Rules in General

The Directive determines the major principles to be complied with in cross border mergers, yet the implementing provisions of EU Member States sometimes differ regarding technical issues. It is therefore essential, when preparing an EU crossborder merger, to identify such differences and inconsistencies early on in the process, and to find ways to resolve them, taking into account the fact that a crossborder merger by definition involves cooperation between persons of different nationalities, sometimes operating within different legal cultures (e.g. common law versus civil law). A company participating in a cross-border merger remains subject to various provisions and formalities of the autonomous national law which have not yet been harmonised. Some aspects which are subject to purely national regulations, which differ to some extent across Members States, are (i) the formalities concerning the decision-making process relating to the merger, i.e. formalities on the convention of shareholder meetings such as periods, formal and publication requirements; (ii) formal requirements for the execution and registration of documents required for a cross-border merger; and (iii) deadlines for the execution, notification, publication and registration of measures to be taken while implementing a cross-border merger. In addition, public authorities involved in the process, e.g. commercial registers, may require varying periods for measures in their responsibility, such as publication of the common draft terms of merger, issuance of the pre-merger certificates or registration of the merger. Deviations in other milestones such as

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periods and measures to be observed in relation to the convention of the general meetings, publication of the common draft terms of merger and the provision of the management report to shareholders, can lead to certain complexities and delays in the process. In themselves, these practical questions can be solved. However, experience has shown that the extra work associated with these practical issues should not be underestimated, and needs to be taken into account for cost and timing purposes.

2.4

National Rules of a Procedural Nature in Relation to Accounting Practices

Many obstacles are also created due to the diverging accounting rules in light of the divergent national laws of Member States. Accounting rules have been reported to create practical and procedural impediments to cross-border mergers. In particular, there are two important dates for cross-border mergers: the effective legal date (registration date) and the accounting date (decisive date) of the merger. According to the Directive, the registration date, which in most Member States is the date when the merger is entered into in the Registry, is governed by the law of the Member State of the successor company, whereas the decisive date, which is the date from which the transferor company’s transactions are treated for accounting purposes as those of the new company (transferee), is governed by Article 5 of the Directive. Under various national laws the accounting date may precede the date when the merger takes legal effect, and other national laws require that the two dates coincide. Other Member States accept both alternatives. In certain instances this differentiation could be very problematic. In light of this lack of harmonisation, empirical studies have shown that procedural difficulties emerge in various Member States. We offer an example revealed by the “Ex-Post analysis of the EU framework in the area of crossborder mergers and divisions” conducted by the Ex-Post Assessment Unit which pinpoints the weaknesses of the abovementioned provisions of the Directive:“In a cross-border merger case between German and Romanian companies, the German company is established in a Member State where the decisive date is prior to the legal date on which the merger enters into effect. The Romanian company is in one of the Member States where the decisive date is the same as the legal date of effect. If the German company sought to merge into the Romanian company, it would be faced with an accounting impossibility: there is a gap in time where none of the companies reports the transaction. Conversely, were the Romanian company to seek to merge into the German one, the opposite problem would occur. The Romanian company would have to include assets and liabilities in two accounting units.”9 Given the possibility of and requirements for tax and accounting retroactivity of a

9 Ex-post analysis of the EU framework in the area of cross-border mergers and divisions (2016), p. 49.

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cross-border merger can deviate between jurisdictions involved, it is therefore submitted that in order to avoid the described frictions, it would be wise to either fully harmonise the provisions of the Directive with the civil procedure national laws of Member States or convert the Directive to a Regulation in order to ensure that the merging companies can enjoy simplicity while facilitating a cross-border mergers efficiently and in a timely manner.

2.5

National Rules of a Procedural Nature in Relation to Creditor Protection

Inconsistencies and practical problems are also identified in relation to the protection of creditors or debenture holders of the merging companies. Article 4(2) of the Directive allows Member States to apply mechanisms that ensure the protection of creditors to the extent that such mechanisms exist in the Member State’s domestic merger legislation. This protection intends to diminish the risk that creditors will find themselves in a worse financial situation than they were before the merger, for example; in case where the assets of the acquiring company would be less than its liabilities,10 or because the new legal system governing the merged entity would have a negative impact on creditors.11 Albeit with considerable divergence as regards to the procedural methods and timeframes of such protection,12 almost all Member States have indeed chosen to implement the optional provision of the Directive relating to the creditor protection.13 The period in which the creditor protection commences depends on each Member State. This can be either prior to the general shareholders meeting, or thereafter. In the former scenario, the date corresponds to the publication of the common draft terms, while in the latter, the date may vary between the decision of the shareholders’ general meeting to merge or the date on which the merger is legally concluded, depending always on the national laws of each Member State.14 The problems of course emerge when one of the merging companies is situated in a Member State where this date starts prior to the general meeting and the other is situated in a Member State where the date starts after the general meeting.15 In such instances, it would be impossible to reconcile the different dates. These are most commonly the cases where the merger certificate has been issued in one Member State but not in the other, while at the same time, the deadline for the filing of the registration has 10

Creditor protection in cross-border mergers: unfinished business (2008), p. 34. Study on the Application of the Cross-Border Mergers Directive (2013), p. 52. 12 Study on the Application of the Cross-Border Mergers Directive (2013), p. 52. 13 Apart from Iceland, all countries have creditor protection mechanisms. See Study on the Application of the Cross-Border Mergers Directive (2013), p. 117. 14 Study on the Application of the Cross-Border Mergers Directive (2013), p. 53. 15 Study on the Application of the Cross-Border Mergers Directive (2013), p. 54. 11

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initiated.16 This is one of the common phenomena which result in what it seems like the creation of unnecessary complexity which could have been dealt with and rectified with the harmonisation of the procedural provisions and rules enacted by the Directive. The date for the beginning of periods for creditor protection and their duration may deviate between jurisdictions, therefore delaying the process as multiple creditor protection periods have to be observed. Such a delay might even conflict with long stop dates to be observed in order to achieve retroactivity for accounting purposes. Second, several jurisdictions provide for veto rights in favour of creditors under specific circumstances which may considerably delay the process. Further, in many cases, shareholders anticipate implementing the merger with retroactive tax and accounting effect as of the day of the latest annual accounts of the companies involved. Furthermore, significant divergences between Member States also exist in regards to the duration of such creditor protection, with time-frames ranging from one month (as in the cases of Denmark, France and Greece) to six months (Czech Republic), or even with no specific date (Lithuania and the UK).17 Again, such differences hinder and enhance uncertainties. This is again a common instance where the merger certificate has already been issued in one Member State but not yet in the other due to differences in applicable creditor protection rules, while the 6-month clock for filing the registration has already initiated. The predominant means of achieving the desired creditor protection would be analysed in the following part of this section while offering an overview of the procedural differences of each Member State in creditor protection mechanisms and their impact. Creditor protection is achieved by requiring creditor security. This approach is followed by 29 out of 30 Member States applying the Directive18; creditors can request that the company provides security in the form of a guarantee or of a debt payment as a precondition to the facilitation of a merger.19 Despite the various common characteristics of the “creditor security” model followed by the most of the Member States, a number of procedural differences exist. In our view, one of the most important differences between the procedural rules of each Member State lays on the type of authority that decides on whether security to creditors should be provided. For example, for one group of Member States, a legally binding decision is delivered by a court of law. For the other group, an administrative decision is handed down by their national Registry.20 In our experience, timeframes between the issuance of a legally binding decision delivered by a court of law and the issuance of a decision by a national Registry vary significantly. Similarly, the costs

16

Report of the Reflection Group On the Future of EU Company Law (2011), p. 28. Study on the Application of the Cross-Border Mergers Directive (2013), p. 54. 18 The only exception is Iceland, See Study on the Application of the Cross-Border Mergers Directive (2013), p. 117. 19 Study on the Application of the Cross-Border Mergers Directive (2013), p. 56. 20 Study on the Application of the Cross-Border Mergers Directive (2013), p. 56. 17

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of each different procedure vary; representing a client in Court is on a general note a much more expensive procedure. The under harmonization of rules has an impact on the divergence of cross-border procedural rules. Some Member States have awarded creditors, veto rights.21 Typically, this option is distinctive of the so called “ex-ante” approach to creditor protection22 under which creditors exercise their right to block or delay mergers involving their debtors and may delay any merger until their rights have been safeguarded. The different options provided by Member States create a whole different divergence on the procedural rules governing the facilitation of crossborder mergers. For example, Netherlands applies an ex-ante system, in which creditors can ask for security if they think that their claims are not sufficiently secured, prior to the conclusion of the cross-border merger. Creditors can file an opposition to the merger at the competent court and request security. Creditors have 1 month to file the said opposition after the merger has been announced in the national gazette. On the other hand, with the so called “ex-post” system, creditors are required to uphold their rights with the resulting company, which may be of course based elsewhere in the European Union, having no ability to block or delay the merger.23 While the “ex-ante” system provides creditors an upfront protection, it may be easily abused in bad faith. On the other hand, the ex-post system prioritises the “mobility” of companies although it does not 100% protect the interests of creditors.24

2.6

National Rules of a Procedural Nature in Relation to Minority Protection

Article 4(2) of the Directive includes an optional provision allowing Member States to create mechanisms that ensure the protection of, inter alia, minority shareholders. Six Member States have relied on the specific protection and introduced different systems of minority shareholder protection, which contemplate procedures that can last from 10 days to 3 months.25 The procedure is initiated either at the general meeting or on the date of the registration or publication of the registration of the merger with the national Registry of the relevant Member State. The regime for the

21 14 Member States have granted veto rights to creditors, while 15 expressly did not, Study on the Application of the Cross-Border Mergers Directive (2013), p. 55. 22 Study on the Application of the Cross-Border Mergers Directive (2013), p. 55. 23 Study of the European Parliament Policy Department C for the Committee on Legal Affairs: Cross-border mergers and divisions, transfers of seat: Is there need to legislate? (2016), p. 18. 24 Creditor protection in cross-border mergers: unfinished business (2008), pp. 37–38. 25 Belgium, Hungary, Lithuania, Luxembourg, Norway and Sweden, See Study on the Application of the Cross-Border Mergers Directive (2013), p. 118.

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protection of minority shareholders is generally characterised by complexity due to the flexibility afforded to Member States by the Directive. The recent proposal of the European Commission for the amendment of the Directive26 (the Proposal) identifies and acknowledges that the protection offered to minority shareholders through national legislation is often “ineffective or insufficient due to the lack of, overlapping or contradictory rules.”27 In the absence of a union wide procedural framework, the protection of minority shareholders has been tossed to each individual Member State. However, even if such protection measures are provided for minority shareholders in the national law of a Member State, these shall only apply if the other merging companies situated in different Member States which do not provide for such protection procedures expressly accept to do so when approving the draft terms of the cross-border merger in accordance with Article 9(1) of the Directive.28

2.7

National Rules of a Procedural Nature in Relation to Employee Protection

Since the introduction of the Directive, Employee participation has been one of the thorniest issues of the entire legislative procedure of the Directive, due to the great divergence in the respective legislative and procedural rules of Member States.29 A major difference between law systems in the EEA is that some require employee participation and others do not regulate the matter. The majority of the Member States (19 out of 30) require that employees are represented in the management or supervisory board of companies,30 whereas the minority of the Member States, do not provide such rights.31 This important legislative difference between the national laws of Member States creates a major divergence in how the Directive is applied in each different Member State. Things get even more complex when each Member State has a very different system of employee participation with greatly divergent rules.32 The minimum size of the company for which employee participation is required, the type of representation the employees receive, the number of board-level employee representatives, the process of their appointment and their responsibilities are only some of the differences found in national laws of Member States which might delay or complicate the facilitation of a cross-border merger according to the

26

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. 27 Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. 28 Article 10 of the Directive. 29 The 10th company law Directive on cross border mergers (2006), p. 310. 30 Study on the Application of the Cross-Border Mergers Directive (2013), p. 72. 31 Study on the Application of the Cross-Border Mergers Directive (2013), p. 71. 32 Study on the Application of the Cross-Border Mergers Directive (2013), p. 71.

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provisions of the Directive.33 Article 16 of the Directive provides that under certain circumstances the management can negotiate with the employees the form of employee participation in the successor company, otherwise certain standard rules apply determining applicable employee participation.34 In practice, the result of failed negotiations between the management and the employees is actually the application of the standard rules on employee participation and/or involvement.35 The negotiation procedure is not compulsory.36 Furthermore, Article 16 of the Directive provides that the rules on employee participation shall follow the laws of the Member State where the registered office of the resulting company is situated. Since this could lead to a significant deterioration of employee participation rights Article 16(2) of the Directive provides for three exceptions to this rule. The exceptions were modelled after the SE Directive37 including few modifications. While the Directive has eliminated the possibility of major deterioration of employees’ participation rights, it has not eliminated the procedural or legislative complexities that arise in light of the divergence of national laws.

2.8

Filings

There are no common forms concerning filings in Court or to the Registries of Member States. A number of the documents referring to the national and foreign companies involved have to be filed with national registries (e.g. the common draft terms of merger) or disclosed to shareholders (e.g. the annual reports of the companies involved). It is therefore important to structure the process for the implementation of the cross-border merger diligently and to decide early on in the process on practical issues such as whether documents are to be prepared in the national language, a foreign language or in bi- or multi-lingual form, requirements for the translation of balance sheets, annual accounts and articles of association, formal requirements for documents, including requirements for notarisation of the same documents in different countries and the due dates for filing or disclosure of relevant documents, particularly the due date for making available the latest financial statements to shareholders. We believe that the harmonisation of legal forms and documents would only have the desired outcome (i.e. to assist the effective and rapid facilitation of the crossborder merger) as soon as the legislative framework of the Directive is fully harmonised. A prominent example supporting this assertion is the pre-merger

33

Study on the Application of the Cross-Border Mergers Directive (2013), p. 71. Article 16 of the Directive. 35 European cross-border mergers after SEVIC (2009), p. 169. 36 Article 16(4)(a) of the Directive. 37 Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees, OJ L 294, 10.11.2001, 22. 34

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certificate required by Article 10(2) of the Directive, which varies in form substantially in different Member States and which could easily take the form of a standardized pre-merger certificate.38 For example, in Cyprus39 and the UK40 it has a form of a Court order, while we understand that in Germany, the notification of registration constitutes the pre-merger certificate.41

2.9

Collaboration Among Registries and the Need of a Central Authority in the EU

The Directive provides for the need for the national company registries of the Member States (the Registries) to collaborate and communicate with each other in cross-border merger procedures, providing necessary information. Nevertheless, legal practitioners and various stakeholders have reported difficulties regarding the communication between the various national authorities involved.42 There are Registries which are slower than others in conducting business. One recurring obstacle is the fact that the national authorities to whom the parties need to report under the Directive rarely have effective means and clear standards for communicating with their counterparts in other Member States. This creates uncertainty among the parties, who sometimes need to step in themselves or their legal advisors in order to bridge over the gaps. This problem increases costs and uncertainty. We believe that these problems can only be resolved by the operation of a central authority on cross border mergers, which shall facilitate the merger process and co-ordinate among the various Registries. This authority can monitor such procedural problems created during the process of a cross border merger. Additionally, it can address questions from Registries and practitioners and serve as the point of inquiries in relation to the subject matter.

2.10

Modern Technology

Studies have shown that emails are rarely used and most of the communications between the different national Registries is made through letters or facsimile

38

Study of the European Parliament Policy Department C for the Committee on Legal Affairs: Cross-border mergers and divisions, transfers of seat: Is there need to legislate? (2016), p. 25. 39 Section 201IΖ of the Cyprus Companies Law Cap.113. 40 The Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974); Civil Procedure Rules, Part 49, Practice Direction 49A. 41 Study of the European Parliament Policy Department C for the Committee on Legal Affairs: Cross-border mergers and divisions, transfers of seat: Is there need to legislate? (2016), p. 25. 42 Ex-post analysis of the EU framework in the area of cross-border mergers and divisions (2016), p. 46.

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transmissions, which are often drafted in the language of the sending authority.43 The mode of communication and language differs significantly in each Member State. Member States have not applied a standard procedure (e.g. regarding means of communication, language and deadlines) for the communication between the national registries of different Member States.44 This has been so particularly prior to the establishment of the Business Registers Interconnection System (BRIS). Notably, the objective of this system is to ensure effective and structured communications, in order to address effectively the abovementioned impracticalities and difficulties.45 Although the deadline for the deployment of the relevant online infrastructure was 8 June 2017, some Member States have not connected to the system. It is vital for communication between Registries to be electronic and standardised in a way that also provides a solution to the language problem.

3 The European Union Does Not Harmonise Procedure It is true that the traditional approach of the European law-making is a less invasive regulatory choice on procedural matters. It simply harmonises national substantive rules without harmonizing procedure. This approach was initially adopted in the Brussels I Convention in 196846 and it still prevails in the area of European civil litigation.47 Nevertheless, this is not a fast and hard rule. We can see that there have been a number of recent successful efforts of harmonisation of European Union laws which contain a procedural aspect.48 A relatively recent example is the establishment and adoption of Regulation (EC) No 1393/2007 of the European Parliament and of the Council of 13 November 2007 on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters (the Regulation 1393/2007). Regulation 1393/2007 has introduced a uniform European procedure which has greatly assisted in the simplification of the service procedure in civil and commercial matters. The procedural harmonisation of the specific autonomous area of law has been described by various practitioners and academics to be a cornerstone in the judicial cooperation in civil and commercial matters within the European Union.49 43

Study on the Application of the Cross-Border Mergers Directive (2013), p. 61. Study on the Application of the Cross-Border Mergers Directive (2013), p. 61. 45 Study on the Application of the Cross-Border Mergers Directive (2013), p. 61. 46 1968 Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters. 47 Harmonized Rules and Minimum Standards in the European Law of Civil Procedure (2016), p. 7. 48 See Council Regulation (EC) No 1393/2007 on the service of judicial and extra judicial documents in civil or commercial matters and Regulation (EU) no 1215/2012 of the European Parliament and of the Council of 12 December 2012. 49 Study on the application of Council Regulation (EC) No 1393/2007 on the service of judicial and extra judicial documents in civil or commercial matters (2014), p. 6. 44

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This legislative initiative had been based on a clear regulatory concept. Another procedural harmonisation initiative has been made through the European Account Preservation Order (EAPO), which allows a court in one EU country to freeze funds in the bank account of a debtor in another EU country. The exact line of where EU procedural legislation is efficient and where regulation is best left to the national level is far from a simple question and has not yet been given a fully satisfactory answer.50 While the EU has generally (and reasonably) abstained from intense harmonisation of civil procedure rules, the rationale of an approach of caution in procedural harmonisation does not necessarily apply in autonomous areas of laws with a cross-border element, in which cases a framework of harmonised procedural rules would be of utmost benefit, without necessarily disturbing national legal orders and practices or touching upon fundamental procedural differences that apply in different EU member states.

4 Conclusion We argue that in areas of law which maintain a cross-border element and are not directly linked with fundamental predispositions of legal systems in the EU (e.g. contentious litigation), there is no reason why harmonisation should not extend to procedure as well in order to achieve the eradication of any disparities among the national laws and regulations of each Member State and, hence, enhance legal certainty and efficiency and reduce costs (legal or otherwise). We also argue that the Directive is precisely one of such areas where a pan European procedural code, regulating the process of cross-border mergers, would be utmost benefit to the European corporate stakeholders and corporate legal community as a whole. In this respect, a directive seems to be an unsuitable instrument. The existence of domestic rules on cross-border mergers is, in many aspects, problematic in itself. With institutions and stakeholders in favour of improvements to the current system of cross-border mergers, the question of how this can be achieved follows. We have attempted to analyse and examine the various suggestions provided by the fellow legal and other practitioners and we have come to the conclusion that an imminent full harmonisation of the provisions of the Directive with national law, at least to serve the purpose of simplifying the cumbersome procedural and administrative rules. The ineffectiveness of the provisions of the Directive in harmonising the crossborder mergers law of the European internal market has been acknowledged in empirical studies by various practitioners and stakeholders. The lack of a clear and safe EU legal framework has been regarded as making the cross-border merger procedure illusory in practice, since the uncertainty of the applicable procedural and legislative rules create a variety of risks for the merging companies.51 While

50 51

The Disorderly Infiltration of EU Law in Civil Procedure (2016), p. 2. Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), p. 32.

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acknowledging the benefits provided to the corporate EU community, the resulting diverging national regimes and timeframes have apparently proved to be a major obstacle in practice.52 In an expanding EU economy, the full harmonisation of the procedural rules of Member States relating to the cross-border merger procedure by the enactment of a Regulation would only simplify procedural rules while regularising what it seems to be a multi-national regulated field.

References 1968 Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters Antunes JE, Baums T et al (2011) Report of the Reflection Group on the Future of EU Company Law: 1–80. Available via http://ec.europa.eu/internal_market/company/docs/modern/reflectiongroup_ report_en.pdf. Accessed 30 Mar 2018 Bech–Bruun and Lexidale (2013) Study on the application of the cross-border mergers Directive for the Directorate General for the Internal Market and Services, the European Union: 1-1026. Available via http://passthrough.fw-notify.net/download/546709/http://ec.europa.eu/internal_ market/company/docs/mergers/131007_study-cross-border-merger-directive_en.pdf Accessed on 04/04/2018 Council Directive No 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees Council Directive No 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees Cyprus Companies Law Cap.113 Directive No 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies Directive No 2012/17/EU of the European Parliament and of the Council of 13 June 2012 amending Council Directive No 89/666/EEC and Directives No 2005/56/EC and No 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and companies registers Dres HC, Hess B et al (2016) Policy Department C: Citizens’ Rights And Constitutional Affairs: Harmonized Rules and Minimum Standards in the European Law of Civil Procedure: 1–14. Available via http://www.europarl.europa.eu/RegData/etudes/IDAN/2016/556971/IPOL_IDA (2016)556971_EN.pdf. Accessed 14 Apr 2018 Kruger T (2016) The disorderly infiltration of EU law in civil procedure. Neth Int Law Rev 63. https://doi.org/10.1007/s40802-016-0053-2. Accessed 9 Apr 2018 Mainstrat; Unievrsidad del Pais Vasco (2014) Study on the application of Council Regulation (EC) No 1393/2007 on the service of judicial and extra judicial documents in civil or commercial matters: 1-257 Available via Europa. https://publications.europa.eu/en/publication-detail/-/ publication/ae2dc230-dd01-49aa-9829-57497c9ee1ce/language-en. Accessed 15 Apr 2018 Papadopoulos T (2011) EU regulatory approaches to cross-border mergers: exercising the right of establishment: 71–97. Available via https://poseidon01.ssrn.com/delivery.php? ID¼01308411309907306608409711810408200712501509506706209001807001209612706506

52 Ex-post analysis of the EU framework in the area of cross-border mergers and divisions (2016), p. 18.

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40810801101011060160151081270581261270300240960750280470470480480431070710821 17121127125066052023104028124105115096110064071006121115115068066064028064127 095122075074068029021&EXT¼pdf. Accessed 10 Apr 2018 Pieper J (2009) European cross-border mergers after. SEVIC Company Law 30(6):169–173 Practice Direction 49A—Applications under the Companies Acts and Related Legislation. https:// www.justice.gov.uk/courts/procedure-rules/civil/rules/part49/pd_part49a Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions.: Available via https://eur-lex.europa.eu/legal-content/EN/TXT/?uri¼COM%3A2018% 3A241%3AFIN. Accessed 23 Mar 2019 Raaijmakers GTMJ, Olthoff TPH (2008) Creditor protection in cross-border mergers; unfinished business: 34–39. Available via https://www.utrechtlawreview.org/articles/abstract/10.18352/ ulr.59/. Accessed 14 Apr 2018 Regulation (EC) No 1393/2007 of the European Parliament and of the Council of 13 November 2007 on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters (service of documents), and repealing Council Regulation (EC) No 1348/ 2000 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters Reynolds S et al (2016) Ex-post analysis of the EU framework in the area of cross-border mergers and divisions, 1–69. Available via http://www.europarl.europa.eu/RegData/etudes/STUD/2016/ 593796/EPRS_STU(2016)593796_EN.pdf. Accessed 5 Apr 2018 Schmidt J (2016) Study of the European Parliament Policy Department C for the Committee on legal affairs: cross-border mergers and divisions, transfers of seat: is there need to legislate? University of Bayreuth, pp 1–43. Available via http://www.europarl.europa.eu/RegData/etudes/ STUD/2016/556960/IPOL_STU(2016)556960_EN.pdf. Accessed 5 Apr 2018 The Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974) Ugliano A (2007) The new cross-border merger directive: harmonisation of European company law and free movement. Eur Bus Law Rev 585:18 Wooldridge F (2006) The 10th company law Directive on cross border mergers. Company Law 27 (10):309–310

Michael Kyriakides is a partner and head of the Corporate Department at Harris Kyriakides LLC in Larnaca, Cyprus. He practices company and commercial law. He has worked extensively in matters involving international corporate litigation and arbitration, interim injunctions, equity investments, cross-border mergers and acquisitions, corporate restructuring and large asset finance transactions. Michael earned a law degree from the National Kapodistrian University of Athens, a Master of Laws from University College London and was awarded the MPhil in Law at the University of Oxford. He is a member of the Corporate Law Committee of the Cyprus Bar Association and a member of the Chartered Institute of Arbitrators. Fryni Fournari is a junior associate at Harris Kyriakides LLC in Larnaca, Cyprus. Qualified in Cyprus, Fryni specialises in Corporate, M&A and Commercial Litigation and holds a law degree from the University of Manchester and has completed a Master of Laws programme at City University London in Maritime Law. She is a member of the Cyprus Bar Association since 2016. She regularly advises clients relating to the full range of company and commercial advisory work and has substantial experience in cases involving cross-border mergers and acquisitions, corporate restructuring, large asset finance transactions and international corporate litigation.

Part III

National Experiences from the Implementation of the Cross-Border Mergers Directive in Some Member States

Experiences from the Implementation of the Cross-Border Mergers Directive in Austria Georg Gutfleisch

1 Introduction With the implementation of the EU Cross-Border Mergers Directive1 by the Corporate Law Amendment Act 2007 (Gesellschaftsrechtsänderungesetz 2007),2 the Austrian legislator introduced the EU Merger Act as a new and separate legal framework for cross-border mergers under participation of Austrian corporations (Kapitalgesellschaften) as well as certain amendments to the existing Austrian merger regime. The EU Merger Act entered into force on 15 December 2007 and transferred most of the core provisions of the EU Cross-Border Mergers Directive, including the requirements for the documentation and scrutiny of the merger, the proceedings before the Austrian courts as well as specific provisions on the exit of dissenting (minority) shareholders and the protection of creditors. Any other aspects not expressively covered by the EU Merger Act have been addressed by reference to existing national laws on domestic mergers in Austria. These include, for instance, relevant provisions of the Austrian Act on Limited Liability Companies (Gesetz über Gesellschaften mit beschränkter Haftung) or the Austrian Stock Corporations Act (Aktiengesetz). The provisions of the EU Cross-Border Mergers Directive regarding employee participation rights have been implemented by an amendment (expansion) of the Austrian Labour Constitution Act (Arbeitsverfassungsgesetz).

1 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies [2005] OJ L 310/1 (EU Cross-Border Mergers Directive), which was subsequently repealed and codified by Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law [2017] OJ L 169/46 (EU Company Law Directive). 2 Gesellschaftsrechtsänderungsgesetz 2007 (GesRÄG 2007), BGBl I No 72/2007.

G. Gutfleisch (*) Brandl & Talos Rechtsanwälte GmbH, Vienna, Austria e-mail: gutfl[email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_12

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According to the Austrian legislator, the introduction of the EU Merger Act as a separate legal framework has been chosen over the (sole) expansion of existing national laws in order to facilitate the structure and understanding of the Austrian legal system and allow an easier reaction to future developments on the European level.3 Although, it can be confirmed that the EU Merger Act indeed facilitated the general understanding of the Austrian (cross-border) merger regime, it will be shown that many practical issues experienced in the course of cross-border mergers in Austria stem from provisions applicable on domestic mergers, which are consequently applied on the European scale.

2 Scope of Application The EU Merger Act generally applies to cross-border mergers of Austrian limited liability companies (Gesellschaften mit beschränkter Haftung) and Austrian stock corporations (Aktiengesellschaften) with corporations (Kapitalgesellschaften) founded or having their registered office, principal administration or main establishment in another EU member state or a member state of the EEA. Although not expressively mentioned, the EU Merger Act also covers cross-border mergers of (existing) European companies (SEs) provided that the concerned merger does not involve the establishment of a new SE.4 The EU Merger Act governs inbound mergers (Hineinverchmelzungen), where a corporation from another EU/EEA member state is merged into an Austrian corporation as absorbing corporation, as well as outbound mergers (Hinausverschmelzungen), where an Austrian corporation is merged as transferring corporation into a corporation from another EU/EEA member state.5 The EU Merger Act further applies to absorbing mergers (Verschmelzungen zur Aufnahme) as well as mergers by formation of a new corporation (Verschmelzungen zur Neugründung).6 Exceeding the minimum requirements imposed by the European legislator, whereas cross-border mergers shall only be possible between types of companies which may merge under the national laws of the relevant EU member state,7 Austria generally enabled Austrian corporations to merge with any kind of corporations of other EU/EEA member states in the sense of the EU Cross-Border Mergers Directive.8 Against the background of its focus on corporations, the EU Merger Act does not apply to mergers involving other corporate forms, such as the general partnership

3

Government Explanations to the GesRÄG 2007, ErläutRV 171 BlgNR 23. GP 1. The cross-border merger by formation of a new SE is generally covered by Council Regulation (EC) No 2157/2001 (see Gassner et al. 2010, para 2). 5 See Frotz and Kaufmann (2013), § 2 VerschG, paras 6–7. 6 See Aburumieh et al. (2014), p. 434. 7 Art. 221 para 1 (a) Company Law Directive. 8 Government Explanations to the GesRÄG 2007, ErläutRV 171 BlgNR 23. GP 1. 4

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(Offene Gesellschaft), the limited partnership (Kommanditgesellschaft), the European economic interest group (Europäische wirtschaftliche Interessenvereinigung), the savings bank (Sparkasse) or the private trust (Privatstiftung).9 In addition, the Austrian legislator chose to exclude mergers involving an Austrian cooperative society (Genossenschaft) from the scope of the EU Merger Act.10 In accordance with the EU Cross-Border Mergers Directive,11 the EU Merger Act further excludes cross-border mergers involving a company, the object of which is the collective investment of capital provided by the public, which operates on the principle of risk-spreading and the units of which are, at the holders’ request, repurchased or redeemed, directly or indirectly, out of the assets of that company.12

3 Outline of Cross-Border Merger Proceedings in Austria 3.1 3.1.1

Documentation Common Draft Terms of the Cross-Border Merger (Verschmelzungsplan)

The common draft terms of the cross-border merger (common draft terms) constitute the basis for a cross-border merger under Austrian law. Similar to domestic mergers, the common draft terms must be prepared and concluded by the management bodies of the merging corporations in the form of a notarial deed (Notariatsakt). The EU Merger Act basically follows the content requirements provided by the EU Cross-Border Mergers Directive. In addition, the EU Merger Act requires the management bodies to include information regarding the cash settlement offered to (minority) shareholders dissenting to an intended outbound merger (see Sect. 4.2.2). This information can only be omitted if all shares in the transferring corporation are held by the absorbing corporation (100% cross-border upstream merger) or all shareholders waive their right for cash compensation, either by written declaration or in the course of the shareholders’ meeting resolving on the merger (see Sect. 3.2).13 In the case of a 100% cross-border upstream merger, it is further not required to include information on the exchange ratio, the allocation of shares in the corporation evolving from the merger or the date from which these shares grant profit participation rights.14

9

See Gassner et al. (2010), para 3. Government Explanations to the GesRÄG 2007, ErläutRV 171 BlgNR 23. GP 1. 11 Art. 120 para 3 EU Company Law Directive. 12 Sect. 4 EU Merger Act. 13 Sect. 5 para 4 EU Merger Act. 14 Sect. 5 para 3 EU Merger Act. 10

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The common draft terms must be submitted to the shareholders of the merging corporations within one month prior to the shareholders’ meeting resolving on the merger (see Sect. 3.2). Furthermore,15 the common draft terms must be published within the same one-month period. In this connection, the EU Merger Act provides for two alternatives. First, the common draft terms can be filed with the Austrian commercial register and a reference to such filing published in the Austrian Official Gazette (Amtsblatt zur Wiener Zeitung).16 Second, the common draft terms and the reference can be published in the Austrian edicts archive (Ediktsdatei).17 In any case, the reference must include (1) the legal form, company name and official seat of the merging corporations, (2) the register and registration number for the documents deposited by each merging corporation pursuant to article 3 Sect. 3 of Directive 2009/101/EG,18 as well as (3) an indication of the arrangements for the exercise of the rights of creditors and minority shareholders and the addresses where the relevant information can be obtained free of charge (see Sects. 4.1.2 and 4.1.3).19 If the sum of the share capital and fixed reserves of the corporation evolving from the crossborder merger is less than of the Austrian transferring corporation, known creditors of the Austrian transferring company must be directly notified (see Sect. 4.1.2).20

3.1.2

Management Report

The management bodies of the merging corporations must further prepare a management report on the intended cross-border merger. The minimum contents of the management report are stipulated by the Austrian Stock Corporation Act (as for domestic mergers) and supplemented by the EU Merger Act. In detail, the management report must provide a legal and economic explanation of (1) the presumed consequences of the merger, (2) the common draft terms, (3) the exchange ratio and the amount of cash compensations (not applicable in the case of a 100% upstream merger), as well as (4) the measures undertaken for the protection of creditors.21 According to the EU Merger Act, the management report must further include an explanation of the consequences for the creditors and the employees of the merging corporations and their claims.22 In the case of an outbound merger, the

15

See Sect. 123 para 1 EU Company Law Directive. Sect. 8 para 1 item 2 EU Merger Act. 17 Sect. 8 para 2a EU Merger Act; The possibility to conduct this alternative form of publication has been introduced in 2011 in the course of the implementation of Directive 2009/56/EG as regards reporting and documentation requirements in the case of mergers and divisions (now codified within the EU Company Law Directive). 18 Now codified in Art. 16 para 3 of the EU Company Law Directive. 19 Sect. 8 para 2 EU Merger Act. 20 Sect. 8 para 2 item 3 EU Merger Act. 21 Sect. 220a Stock Corporations Act. 22 Sect. 6 para 1 EU Merger Act. 16

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management bodies of the merging corporations must also include information regarding the amount of the share capital and fixed reserves of the merging corporations (see Sect. 4.1.2). The management report must be submitted to the shareholders within one month prior to the shareholders’ meeting resolving on the merger (see Sect. 3.2). Further, it must also be submitted to the works council (or the employees when no works council has been established) of the concerned corporation within the same one-month period. Provided that the works council issues a (written) opinion to the management report, such opinion must be attached. Other than for domestic mergers, the shareholders cannot waive the requirement for a management report.23

3.1.3

Report of the Merger Auditor

The common draft terms must be audited by an external and independent expert as merger auditor. The requirements for such audit are provided by the relevant provisions of the Austrian Stock Corporations Act applicable to domestic mergers and further modified by the EU Merger Act. The merger auditor is generally appointed by the supervisory board of the concerned corporation.24 If a corporation does not dispose of a supervisory board (see Sect. 3.1.4), the management body is obliged to apply for the appointment of a merger auditor to the competent court.25 Provided that the supervisory boards (or management bodies) of the merging corporations file a joint application, the court may appoint a joint merger auditor for all merging corporations.26 According to the EU Merger Act, the merging corporations may file such application either with the competent court for the transferring corporation or the absorbing corporation.27 The audit requirement can be omitted in the case of a 100% cross-border upstream merger or if all shareholders waive the requirement for an audit report, either by written declaration or in the course of the shareholders’ meeting resolving on the merger (see Sect. 3.2).28 The audit report must be submitted to the shareholders within one month prior to the shareholders’ meeting resolving on the merger (see Sect. 3.2). The audit report shall particularly indicate whether the proposed exchange ratio and/or cash compensation can be considered as reasonable (angemessen). In detail, the auditor shall indicate (1) the methods pursuant to which the proposed exchange ratio has been determined, (2) the reasons for the application of the chosen methods, (3) differentiations of values obtained from the applied methods, (4) potential difficulties in the valuation of the exchange ratio and/or the cash compensation, as well as (4) an

23

Sect. 6 para 1 Merger Act; See Hasenauer and Hiller (2008), p. 186. Sect. 220b para 2 Stock Corporations Act. 25 Sect. 100 para 2 Act on Limited Liability Companies. 26 Sect. 220b para 2 Stock Corporations Act. 27 Sect. 7 para 2 EU Merger Act. 28 Sect. 232 para 1 and 2 Stock Corporations Act; Sect. 7 para 1 EU Merger Act. 24

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opinion on how the different values have been weighted for the final determination.29 In the case of an outbound merger, the audit report must also provide information regarding the share capital and fixed reserves of all involved corporations (see Sect. 4.1.2).

3.1.4

Report of the Supervisory Board

Austria generally implemented a two-tier board system, whereas the supervisory board is established as a separate body from the operative management (the managing directors in the case of an Austrian limited liability company and the management board in the case of an Austrian stock corporation). Austrian stock corporations mandatorily dispose of a supervisory board. Austrian limited liability companies are basically only required to establish a supervisory board when they reach a certain size in terms of their share capital, number of shareholders and/or employee count.30 Provided that a corporation disposes of a supervisory board, the supervisory board must mandatorily be involved in the (cross-border) merger proceedings. Since the EU Cross-Border Mergers Directive as well as the EU Merger Act remain silent on this requirement, it can be seen as example of the national law on domestic merges affecting cross-border mergers under Austrian participation in the EU.31 The supervisory board report must be submitted to the shareholders within one month prior to the shareholders’ meeting resolving on the merger (see Sect. 3.2). Since the report of the supervisory board is based on the management report and the report of the independent auditor, these reports should be prepared well before this one-month period.32 The report of the supervisory board may be omitted if the transferring corporation does not exceed a certain book-value generally determined by the supervisory board for transactions in advance.33 The report of the supervisory board can further be omitted in the case of a 100% cross-border upstream merger or if all shareholders waive the requirement for an audit report, either by written declaration or in the course of the shareholders’ meeting resolving on the merger (see Sect. 3.2).34 In any case, the supervisory board must be involved in and informed by the management of the cross-border merger proceedings.

29

Sect. 220b para 4 Stock Corporations Act. Among other scenarios, where the corporation is part of a group of companies (see Sect. 29 Act on Limited Liability Companies). 31 Schindler and Stingl (2009), Chap. I, Sect. 5.3. 32 See Gassner et al. (2010), para 21. 33 Sect. 220c Stock Corporations Act. 34 Sect. 232 para 1 and 2 Stock Corporations Act; Sect. 7 para 1 EU Merger Act. 30

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231

Balance Sheet Requirements

One of the most vital aspects in terms of the timing and preparation of a (crossborder) merger under Austrian law concerns the preparation and audit of required balance sheets on which the intended merger is based. From a corporate law perspective, Austrian law provides for the requirement of a closing balance sheet (Schlussbilanz) of the transferring corporation as well interim balance sheets (Zwischenbilanzen) of the transferring and/or absorbing corporation (serving as additional information source for the shareholders). In the case of a of cross-border merger by formation of a new corporation, Austrian law additionally requires the preparation of an opening balance sheet (Eröffnungsbilanz) of the newly established corporation. Austrian reorganization tax law mandates the preparation of a so-called merger balance sheet (Verschmelzungsbilanz). The closing balance sheet must be prepared by an Austrian transferring corporation as of the effective date of the merger (Verschmelzungstichtag).35 The effective date of the merger must be determined at a date within 9 months prior to the submission of the merger filing to the Austrian commercial register (see Sect. 3.3).36 To avoid the requirement for the preparation of an additional balance sheet, the common practice in Austria regularly utilizes the last annual accounts of the concerned corporation as closing balance sheet.37 The closing balance sheet is subject to the regular requirements for the financial statements of the concerned corporation, whereas the merger balance sheet must be drawn-up in the same manner. Depending on whether the concerned corporation is subject to a mandatory audit of its annual accounts, the closing balance sheet must be audited.38 The requirement for an interim balance sheet can be waived by all shareholders of the merging corporation(s).39 Otherwise, the interim balance sheet could be required from the transferring as well as the absorbing corporation.40 In general, the management bodies shall prepare an interim balance sheet if the latest annual accounts of the concerned corporation are prepared on the basis of a balance sheet date, which is more than 6 months before the conclusion or preparation of the common draft terms.41 The interim balance sheet must be prepared as of a balance sheet date, which is not before the first day of the third month prior to the conclusion or 35

Sect. 220 para 3 Stock Corporations Act; Sect. 96 para 2 Act on Limited Liability Companies. Sect. 220 para 3 Stock Corporations Act; Sect. 96 para 2 Act on Limited Liability Companies. 37 See Aburumieh et al. (2014), p. 94. 38 Under Austrian law, the requirement to audit the financial statements of a corporations depends on its size by means of balance sheet total, turnover and/or employee count (see Sect. 221 Austrian Companies Act (Unternehmensgesetzbuch)). 39 In the case of a stock corporation such waiver must be unanimously declared by the shareholders of all merging corporations. In the case of a limited liability company, it has been contested that the unanimous waiver of all shareholders of the concerned limited liability company is sufficient (see Aburumieh et al. 2014, p. 100). 40 See Aburumieh et al. (2014), p. 99. 41 Sect. 221a para 2 item 3 Stock Corporations Act. 36

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preparation of the common draft terms. Similar to the closing balance sheet, the interim balance sheet is subject to an independent audit if such requirement generally applies to the concerned corporation.

3.2

Shareholders’ Approval

To allow the shareholders an informed decision on the intended cross-border merger, Austrian law provides for extensive information and disclosure obligations. The resolution of the shareholders is generally based on (1) the common draft terms, (2) the management report, (3) the report of the merger auditor (if not waived), as well as (4) the report of the supervisory board (if established and not waived). These documents must be submitted to the shareholders of an Austrian limited liability company or made available for inspection at the offices of an Austrian stock corporation (or on its website) at least one month before the shareholders’ meeting resolving on the merger.42 In the case of an outbound merger, the creditors of the transferring Austrian corporation are entitled to receive copies of the above documents free of charge.43 In addition, the following requirements must be met prior to this one-month period: • The shareholders must be provided with the financial statements (including the annex and the potentially prepared corporate governance report) of the merging corporations for the last three business years, a potentially required and already audited (separate) closing balance sheet, as well as potentially required interim balance sheets.44 • The common draft terms must be filed with the competent court of the involved Austrian corporation and a reference published in the Austrian Official Gazette. Alternatively, the common draft terms and the reference can be published in the Austrian edicts archive (see Sect. 3.1.1). • The management report must be submitted to the works council (or the employees when a works council has not been established) of the merging Austrian corporation (see Sect. 3.1.2). Provided that the articles of association do not provide for more stricter requirements (facilitations are not possible), the approval of the intended cross-border merger by the shareholders of an Austrian Stock Corporation requires a double majority by means of at least 50% of the votes cast (Stimmenmehrheit) and at least 75% of the represented share capital (Kapitalmehrheit).45 In the case of an Austrian limited liability company, the resolution must be supported by at least 75% of the

42

See Gassner et al. (2010), paras 23–24. Sect. 8 para 3 EU Merger Act. 44 Sect. 221a para 2 item 2 Stock Corporations Act. 45 See Aburumieh et al. (2014), p. 145. 43

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votes cast.46 The Austrian Act on Limited Liability Companies provides for further requirements in the case of a potentially required consent of shareholders with special rights or specific provisions of the articles of association.47 The resolution by the shareholders of the absorbing corporation is not required if the absorbing corporation is holding at least 90% of the shares in the transferring corporation or if the shares granted to the shareholders in the transferring corporations do not exceed 10% of the share capital of the absorbing corporation.48 In these cases, a minority of 5% can nevertheless demand the conduct of a shareholders’ meeting.49 For a 100% upstream merger, Austrian law provides for the possibility to waive the requirement of a shareholders’ resolution by the transferring corporation.50 Other than for domestic mergers, the shareholders may resolve their approval under the condition that the details of the employee representation in the corporation evolving from the merger (see Sect. 4.3) are subsequently confirmed by the shareholders.51 As regards to the limits of potential recourses of (minority) shareholders against the validity of the shareholders’ resolution, see Sect. 4.2.

3.3 3.3.1

Court Proceedings and Effects of the Merger Outbound Mergers

The proceedings regarding the registration of an outbound merger in the Austrian commercial register are mandated in detail by the EU Merger Act. The registration process regarding the cross-border merger of an Austrian transferring corporation is divided into two steps. In the first step, the management body of the transferring Austrian corporation has to file the intended cross-border merger with the competent court at its registered office.52 This filing must include the (1) the common draft terms, (2) the minutes of the shareholders’ meeting approving the merger, (3) potentially required governmental approvals, (4) the management and (if applicable) supervisory board report of the Austrian transferring corporation, (5) the report of the merger auditor (if not waived), (6) the closing balance sheet of the Austrian transferring corporation, (7) a

46

See Aburumieh et al. (2014), p. 145. Sect. 99 Act on Limited Liability Companies provides for certain (majority) requirements in the case of (1) shareholders with special rights attached to their shares, (2) special provisions in the articles of association regarding the resolution on the merger or the (general) transferability of shares as well as (3) not fully-paid in cash contributions by the shareholders at the time of the merger. 48 Sect. 231 para 1 Stock Corporations Act. 49 Sect. 231 para 3 Stock Corporations Act. 50 Sect. 9 para 2 EU Merger Act. 51 Sect. 9 para 1 EU Merger Act. 52 Sect. 14 para 1 EU Merger Act. 47

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proof for the publication of the common draft terms, (8) a proof for the safeguarding of the cash compensation for shareholders dissenting to the intended outbound merger (see Sect. 4.2.2), as well as (9) a proof for the safeguarding of potential claims of creditors of the Austrian transferring corporation and a declaration that no (other) creditors have claimed security for their claims (see Sect. 4.1).53 In terms of timing, it must be noted that the latter generally involves a waiting period for the issuance of the pre-merger certificate of 2 months after the common draft terms have been published (see Sect. 3.1.1).54 The application must further include two declarations. First, all members of the management body must declare that no lawsuit seeking the challenge or the determination of nullity of the shareholders’ resolution has been filed within one month after the resolution or that all shareholders have declared their waiver to such lawsuit.55 Second, all members of the management body of the Austrian transferring corporation must declare if and how many shareholders have opposed to the intended outbound merger and exercised their right to cash compensation (see Sect. 4.2.2).56 Such statement must further confirm that the shares of these shareholders can be taken over by the remaining shareholders. Provided that the Austrian transferring company is listed on the Austrian stock exchange, provisions of Austrian takeover law (such as a mandatory public offering) must be considered.57 If all preparatory actions have been conducted, the Austrian court issues a pre-merger certificate and registers the intended cross-border merger in the Austrian commercial register.58 In a second step and after the effectiveness of the merger by registration in the commercial register in the other EU/EEA member state (at the seat of the absorbing corporation), the management body of the Austrian transferring company must apply for the deletion of the Austrian transferring company from the Austrian commercial register.59 This application must include the certificate of the commercial register at the seat of the corporation emerging from the merger confirming that the merger is effective (see Sect. 3.3.3).

3.3.2

Inbound Mergers

The proceedings regarding the registration of an inbound merger are provided by the EU Merger Act and supplemented by the Austrian Stock Corporation Act. Other than in the case of outbound mergers, the registration of an inbound merger is conducted by a single application.

53

Sect. 14 para 1 EU Merger Act. See Schindler and Stingl (2009), Chap. I, Sect. 9. 55 Sect. 14 para 2 item 1 EU Merger Act. 56 Sect. 14 para 2 item 2 EU Merger Act. 57 Sect. 14 para 2a EU Merger Act. 58 Sect. 14 para 3 EU Merger Act. 59 Sect. 14 para 5 EU Merger Act. 54

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The management bodies of the merging corporations must apply for the registration of the cross-border merger at the competent court at the seat of the (Austrian) corporation evolving from the cross-border merger. The application must include originals or notarized copies of (1) the common draft terms, (2) the minutes of the shareholders’ meeting of the merging corporations approving the cross-border merger, (3) potentially required governmental approvals, (4) the management and (if applicable) supervisory board report, (5) the report of the merger auditor (if required), (6) the closing balance sheet of the transferring corporation as well as (7) a proof for the publication of the common draft terms in the Austrian Official Gazette or Austrian edicts archive.60 In addition, the EU Merger Act requires a proof that the negotiations regarding the employee participation in the (Austrian) corporation evolving from the merger have been duly conducted and concluded in accordance with the Austrian Labour Constitution Act (see Sect. 4.3).61 The application must also include the pre-merger certificate of the competent authority of the transferring corporation, which must not be older than 6 months.62 In the case of a cross-border merger by formation of a new corporation in Austria, the application must also include the documentation required for the establishment of the new corporation in the Austrian commercial register, such as the articles of association or the documents regarding the establishment of the supervisory board (if applicable) and the appointment of the management body.63 The Austrian court particularly scrutinizes whether the common draft terms have been executed by the merging corporations and whether the merging corporations have duly conducted and completed the negotiations regarding the employee participation (see Sect. 4.3).64 The cross-border merger becomes effective on the date following the registration in the Austrian commercial register.65 Austrian courts are instructed to directly inform the courts of the transferring corporations of the registration in the Austrian commercial register.66

3.3.3

Effects of the Merger

Under Austrian law, the effects of a cross-border merger are similar to the effects of a domestic merger. As a general principle, the transferring corporation is transferred to the absorbing corporation by way of universal succession (Gesamtrechtsnachfolge). In detail, the merger causes (1) that any company-related rights, obligations and assets of the transferring corporation are transferred ex lege to the absorbing

60

Sect. 225 Stock Corporations Act. Sect. 15 para 2 EU Merger Act. 62 Sect. 15 para 2 EU Merger Act. 63 Sect. 233 Stock Corporations Act. 64 Sect. 15 para 3 EU Merger Act. 65 Sect. 15 para 4 EU Merger Act. 66 Sect. 15 para 4 EU Merger Act. 61

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corporation as well as (2) that the transferring corporation ceases to exist.67 The cross-border merger becomes effective with the registration in the commercial register at the seat of the absorbing corporation.68 The subsequent registration in official registers (such as the commercial register at the seat of the transferring corporation or the land register) are conducted with declaratory effect.69

4 Selected Issues of Cross-Border Mergers in Austria 4.1 4.1.1

Creditor Protection General Remarks

In principle, Austrian law differentiates between the protection of creditors prior to the intended merger (vorgelagerter Gläubigerschutz) and following the completion and effectiveness of the merger (nachgelagerter Gläubigerschutz).

4.1.2

Pre-Merger Protection

The cornerstone of pre-merger creditor protection in Austria is the principle of capital maintenance (Kapitalerhaltung).70 In essence, this principle means that the assets of a corporation may not be transferred or released to the shareholders other than in the course of the fulfilment of an arm-length contract, the (annual) distribution of profits or the implementation of a structured capital reduction of the concerned corporation.71 Since the creditors are generally not entitled to assert their claims directly against the shareholders of the corporation, the corporations’ capital serves as main liability fund and may, therefore, not be (unjustifiably) transferred to the shareholders. The Austrian capital maintenance principle has been intensively discussed in the area of intra-group mergers following a leverage buyout (LBO) or management buyout (MBO).72 According to the Austrian Supreme Court (Oberster Gerichtshof), the main issue in this connection concerns the transfer of assets of the transferring corporation to the absorbing corporation (which has entered into the acquisition credit agreement) in the course of a 100% upstream merger. As a result, the transferring corporation would be liable for the acquisition credit of the absorbing corporation (its shareholder) without receiving an adequate

67

See Schindler and Stingl (2009), Chap. I, Sect. 3; See Gassner et al. (2010), para 6. Sect. 15 para 4 EU Merger Act. 69 See Schindler and Stingl (2009), Chap. I, Sect. 3. 70 See Aburumieh et al. (2014), pp. 454–458. 71 See Kalss (2017), 3/1036. 72 See Talos T, Arzt M in Talos and Winner (2016), pp. 417–418. 68

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compensation.73 To address the principle of capital maintenance in Austrian merger law, Austrian practice developed two basic rules for the scrutiny by the Austrian courts. On the one hand, a merger is only possible if the assets of the transferring corporation dispose of a positive fair market value (positiver Verkehrswert).74 Also, the assets of the absorbing corporation should generally dispose of a positive fair market value.75 From the Austrian perspective, the fair market value of the transferring corporation in a cross-border merger is particularly relevant for inbound mergers. In the case of outbound mergers, the application of the Austrian capital maintenance requirements has not yet been clarified but could be relevant if the negative fair market value of the absorbing corporation is threatening the claims of Austrian creditors (this would then apply in addition to the creditor protection safeguards of the EU Merger Act).76 On the other hand, it is essential that the merger does not lead to a release of capital by means of a capital releasing effect (kapitalentsperrender Effekt). In principle, the capital releasing effect applies when a corporation is merged as transferring corporation with a corporation as absorbing corporation with a lower share capital amount.77 From an Austrian perspective, this principle primarily applies in the case of outbound mergers, where the share capital of the absorbing corporation of the other EU/EEA member state is less than the share capital of the Austrian transferring corporation.78 On the European scale, it must be noted that Austrian courts are only competent to assess the protection of creditors of involved Austrian corporations. Further, the Austrian Supreme Court ruled on the application of the Austrian capital maintenance principle in the case of an Austrian reference (Österreichbezug) of the cross-border merger, which would, for instance, be the case if the Austrian absorbing corporation is a 100% parent company of the transferring corporation.79 Although the EU Merger Act does not explicitly mandate the capital maintenance principle, it has been established that it shall apply similarly as for domestic mergers. The EU Merger Act touches the principle of capital maintenance in relation to outbound mergers and provides that the management report and the merger auditor report must include information on the share capital and fixed reserves of the merging corporations (see Sects. 3.1.2 and 3.1.3).80 In addition, the EU Merger Act imposes specific pre-merger creditor protection measures. Within a period of 2 months after the

73

See Talos T, Arzt M in Talos and Winner (2016), pp. 417–418; OGH, 20 March 2013, 6 Ob 48/12w. 74 See Kalss (2017), 3/1138. 75 See Aburumieh et al. (2014), p. 457. 76 See Aburumieh et al. (2014), p. 457. 77 See Kalss (2017), 3/1138. 78 See Aburumieh et al. (2014), pp. 455 and 457. 79 See Talos T, Arzt M in Talos and Winner (2016), p. 76; OGH, 15 April 2010, 6 Ob 226/09t. 80 See Aburumieh et al. (2014), pp. 454–458.

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publication of the common draft terms (see Sect. 3.1.1), the creditors of an Austrian transferring corporation may demand the safeguarding (Sicherstellung) of their claims, which are not yet due for payment. Such safeguarding must be granted, if the creditor can credibly show (glaubhaft machen) that the collection of the claim would be threatened by the intended merger or (in any case) if the share capital and fixed reserves of the absorbing corporation in the other EU/EEA member state are less than of the Austrian transferring corporation.81 Further, the EU Merger Act addresses the holders of debentures (Schuldverschreibungen) or profit participation certificates (Genussrechten) to which the corporation evolving from the merger must grant equal rights.82 The safeguarding of creditors and holders of debentures or profit participation certificates is a requirement for the issuance of the pre-merger certificate in accordance with the EU Merger Act (see Sect. 3.3.1).83

4.1.3

Post-Merger Protection

Inbound mergers are generally subject to post-merger creditor protection safeguards, which are similarly applicable to domestic mergers in Austria.84 In detail, the Austrian Stock Corporation Act provides that creditors may demand the safeguarding of their undue claims within 6 months following the effectiveness of the merger.85 Safeguards must be granted, if the creditor can credibly show (glaubhaft machen) that the successful collection of the claim is threatened by the merger. Further, the holders of debentures (Schuldverschreibungen) or profit participation certificates (Genussrechten) must be granted rights of equal value or a reasonable compensation for the alteration or cancellation of the concerned rights following the completion and effectiveness of the concerned merger.86 The issue of investor protection in the course of a cross-border inbound merger has recently been subject to proceedings before the Austrian Supreme Court87 and a preliminary ruling of the European Court of Justice (CJEU).88 The background of the case KA Finanz AG v Sparkassen Versicherung AG concerned the cross-border merger of Kommunalkredit (Cyprus) as transferring corporation with KA Finanz (Austria) as absorbing corporation. Before the merger took place in 2010, Sparkassen Versicherung AG (claimant) subscribed two subordinated loans with Kommunalkredit.89 The parties agreed on the application of German law. In the

81

Sect. 13 para 1 EU Merger Act. Sect. 13 para 2 EU Merger Act. 83 Sect. 13 para 2 EU Merger Act. 84 See Aburumieh et al. (2014), pp. 457–458. 85 Art. 226 para 1 Stock Corporation Act. 86 Art. 226 para 3 Stock Corporation Act. 87 OGH, 20 July 2016, 6 Ob 80/16g. 88 Case C-483/14 KA Finanz AG v Sparkassen Versicherung AG Vienna Insurance Group. 89 Case C-483/14, para 19. 82

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course of the proceedings in Austria, Sparkassen Versicherung AG claimed interest payments for 2009 and 2010, alternatively, the allocation of equal rights in KA Finanz as legal successor of Kommunalkredit.90 KA Finanz contested the claim and basically argued that the subordinated loans have been terminated in accordance with Sect. 226 para 3 Stock Corporation Act.91 The court of first instance and the court of recourse denied the (interim) motion of KA Finanz to confirm the termination of the subordinated loans.92 After having submitted the case to the CJEU for a preliminary ruling, the Austrian Supreme Court confirmed these decisions and ruled that the subordinated loan contracts have been transferred due to the principle of universal succession.93 As regards the applicable law, the Austrian Supreme Court followed the CJEU and ruled that the chosen law (German law) remains applicable on the termination of the contracts following the merger.94 Consequently, the Austrian Supreme Court examined the relevant provision of Sect. 23 German Conversion Act (deutsches Umwandlungsgesetz), whereas the absorbing corporation must grant rights of equal value or a reasonable compensation and concluded that this provision does also not automatically result in the termination of the concerned loan contracts.95 As regards to the legal framework on creditor protection, the Austrian Supreme Court confirmed that the law to which the transferring corporation has been subject to prior to the merger remains applicable. Based on the scope of the proceedings (limited to the application of Art 226 para 3 Stock Corporations Act and Sect. 23 German Conversion Act), the Austrian Supreme Court did, however, not examine relevant provisions of Cyprian creditor protection laws.96 This approach has been criticized by Austrian scholars as missed opportunity to provide for legal certainty on the interpretation of creditor protection safeguards in the course of cross-border mergers in the EU.97

90

Case C-483/14, para 26. Case C-483/14, para 27. 92 The court of recourse (Oberlandesgericht Wien) concluded that subordinated loans are generally not covered by Sect. 226 para 3 Stock Corporations Act, as subordinated loans only grant a claim for interest and principal payments but no “special rights” in the sense of this provision (see Klampfl 2016, p. 350). 93 OGH, 20 July 2016, 6 Ob 80/16g, para 3. 94 OGH, 20 July 2016, 6 Ob 80/16g, para 3. 95 Sect. 23 German Conversion Act states that the holders of rights in the transferring corporation, which do not grant voting powers, especially the holders of shares without voting power, convertible bonds, profit participation rights as well as profit shares, are to be granted equal rights in the absorbing corporation. 96 See Klampfl (2016), p. 350. 97 See Klampfl (2016), p. 350. 91

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Shareholder Protection General Remarks

The protection of (minority) shareholders is one of the most vital aspects of Austrian merger law. In principle, Austrian law provides that the shareholders of a transferring corporation are to be reimbursed for the loss of their shares in the transferring corporation with shares in the absorbing corporation.98 The nominal value of shares granted in the absorbing corporation is determined by the exchange ratio—in other words: How many shares in the absorbing corporation are granted in exchange for the lost shares in the transferring corporation. In Austria, additional cash payments are only permitted if they do not exceed 10% of the value of the shares allocated to the shareholders of the transferring corporation.99 The protection of (minority) shareholders is generally positioned after the effectiveness of the concerned merger (post-merger protection). In the case of crossborder mergers, Austrian law provides for two legal institutions.

4.2.2

Exit and Cash Compensation

First, the EU Merger Act expressively addresses the protection of minority shareholders in the case of outbound mergers. In detail, each minority shareholder of an Austrian transferring corporation is granted the right to oppose an outbound merger and exit the corporation against an adequate cash compensation for the shares held in the concerned corporation.100 The cash compensation offer must already be included in the common draft terms (see Sect. 3.1.1) and scrutinized by the merger auditor (see Sect. 3.1.3). According to Austrian scholars, the cash compensation shall be offered by the Austrian transferring corporation.101 Alternatively, it can be agreed that the cash compensation is paid by the (foreign) absorbing corporation or any other person (related or not related to the concerned cross-border merger).102 Minority shareholders intending to exit the corporation must oppose to the intended cross-border merger in the course of the shareholders’ meeting resolving on the merger. The offered cash compensation may be accepted directly in the shareholders’ meeting or within one month after the shareholders’ meeting resolving on the merger. If accepted, the claim for cash compensation is due with the effectiveness of the merger and subject to a statute of limitations of 3 years.

98

See Kalss (2017), 3/1129. See Gassner et al. (2010), para 5. 100 Sect. 10 para 1 EU Merger Act. 101 See Winner M, Obradovic V in Arzt M in Talos and Winner (2016), p. 279. 102 See Winner M, Obradovic V in Arzt M in Talos and Winner (2016), p. 289. 99

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The claim for the cash compensation of dissenting minority shareholders must be safeguarded to ensure the proper payment. In addition, each dissenting minority shareholder has the right to apply to the competent Austrian court to examine the adequacy of the offered cash compensation. The application must be filed with the court within one month after the shareholders’ resolution approving the merger.103 The alleged lack of the adequacy of the offered cash compensation or related defects in the merger documentation may generally not justify the (overall) challenge of the shareholders’ resolution approving the merger.104

4.2.3

Examination of the Exchange Ratio

Second, Austrian law provides for the right of the shareholders to apply to the Austrian courts to examine the adequacy of the applied exchange ratio.105 Such application may only be asserted within one month after the merger has been registered in the Austrian commercial register (not before).106 The challenge of the shareholders’ resolution resolving on the cross-border merger or an application regarding the determination of its nullity may not be based on the grounds of an alleged defect of the exchange ratio.107 As for cross-border mergers, the EU Merger Act provides for a diverging regime to this principle.108 In detail, a challenge of the shareholders’ resolution on the grounds of an alleged defect of the exchange ratio shall only be excluded when all merging corporations in another EU/EEA member state (which does not provide for a similar procedure in their national laws) expressively declare to allow proceedings before the Austrian courts to examine the adequacy of the exchange ratio.109 In the case of an outbound merger, the shareholders of the transferring Austrian corporation must declare their intention to initiate proceedings to examine the exchange ratio in the shareholders’ meeting approving the merger or within one month after such shareholders’ meeting.110 The pre-merger certificate must indicate the such application.111 In the case of an inbound merger, the shareholders of the transferring corporation with the seat in another EU/EEA member state are only permitted to initiate proceedings to examine the exchange ratio if the merger certificate indicates that all of the shareholders of the transferring corporation have waived their right to challenge the shareholders’ resolution approving the merger and all transferring

103

Sect. 11 para 2 EU Merger Act. Sect. 11 para 1 EU Merger Act. 105 Sect. 225c para 2 Stock Corporations Act; See Kalss (2017), 3/1158. 106 Sect. 225e para 2 Stock Corporations Act. 107 Sect. 225b Stock Corporations Act. 108 See Gassner et al. (2010), para 49. 109 Sect. 12 para 1 items 1 and 2 EU Merger Act. 110 Sect. 12 para 2 EU Merger Act. 111 See Government Explanations to the GesRÄG 2007, ErläutRV 171 BlgNR 23. GP 15. 104

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corporations expressively allow the shareholders to initiate such proceedings before the Austrian courts.112 Based on the implementation of domestic shareholder safeguards within the EU Merger Act, the Austrian regime on post-merger shareholder protection takes a rather unique position among the EU member states. According to the legislative materials to the EU Merger Act, the official examination of the exchange ratio after the completion and effectiveness of the merger is only provided in Austria and Germany.113

4.3

Employee Participation

As a general principle, an Austrian corporation evolving from a cross-border merger (inbound merger) would be subject to Austrian labour law. Relevant aspects in the area of employee participation include the participation of employees in the potentially established supervisory board.114 In line with the EU Cross-Border Mergers Directive,115 the Austrian Labour Constitution Act (Arbeitsverfassungsgesetz) provides for a special chapter (chapter VIII) derogating the regular provisions of Austrian labour law. In the case that (1) one of the merging corporations involved in a cross-border merger employed more than 500 employees in aggregate within the last 6 months preceding the conclusion or preparation of the common draft terms, the law applicable to this corporation is applicable as long as it provides for an employee participation system,116 (2) the law applicable to the corporation evolving from the cross-border merger (Austrian law) does not provide for the same level of employee participation as another law of one of the transferring corporations, the law applicable to this transferring corporation is applicable,117 or (3) the law applicable to the corporation evolving from the cross-border merger (Austrian law) does not provide employees of an establishment in another EU/EEA member state the same participation rights as Austrian employees, the law of the respective establishment shall be applicable.118 Provided that one of the above exceptions applies, the competent employee representatives of the merging corporations must form a special negotiation body (Besonderes Verhandlungsgremium), which negotiates and agrees with the management bodies of the merging corporations on the employee participation in the corporation evolving from the cross-border merger.119 In the case that the

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Sect. 12 para 3 EU Merger Act. Government Explanations to the GesRÄG 2007, ErläutRV 171 BlgNR 23. GP 15. 114 See Hasenauer and Hiller (2008), p. 188. 115 Sect. 133 EU Company Law Directive. 116 Sect. 258 para 1 item 1 Labour Constitution Act. 117 Sect. 258 para 1 item 2 Labour Constitution Act. 118 Sect. 258 para 1 item 3 Labour Constitution Act. 119 See Gassner et al. (2010), para 55. 113

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negotiations are not successful, the application of the law with the highest level to which one of the merging corporations is subject shall be applicable.120 The management bodies must comply with detailed information obligations and duly include information on the proper conduct of negotiations within the cross-border merger documentation (see Sect. 3.1.2). Since the registration of the merger is dependent on the proper compliance with the provisions of the Austrian Labour Constitution Act (see Sect. 3.3.2),121 the duly consideration of these provisions (if applicable) are essential for the success of an intended cross-border merger.

5 Conclusion Concluding, it has been shown that the Austrian legislator conducted a rather close implementation of the EU Cross-Border Mergers Directive. Most provisions of the EU Cross-Border Mergers Directive have been introduced by the EU Merger Act as separate legal framework. Given the general scope of European harmonization in the area of cross-border mergers, the Austrian regime is supplemented by its national laws applicable on domestic mergers. Thus, the Austrian regime on cross-border mergers in the EU provides for certain specific particularities. Examples of these rules include, for instance, the mandatory involvement of the supervisory board in the course of the cross-border merger proceedings, the principle of capital maintenance and concerned creditor protection safeguards or the national provisions on the post-merger protection of (minority) shareholders. These issues must be particularly considered by practitioners involved in cross-border mergers under participation of one or more Austrian corporations.

References Aburumieh N, Adensamer N, Foglar-Deinhardstein H (eds) (2014) Praxisleitfaden Verschmelzung (Practice guidelines mergers). LexisNexis Verlag ARD Orac Frotz S, Kaufmann A (eds) (2013) Grenzüberschreitende Verschmelzungen (Cross-border mergers). LexisNexis Verlag ARD Orac Gassner G, Hable A, Lukanec H (2010) Austria. In: Van Gerven D (ed) Cross-border mergers in Europe, vol 1. Cambridge University Press Hasenauer C, Hiller P (2008) New legal regime in Austria on EU/EEA cross-border mergers. Eur Company Law 5:185 Kalss S (2017) Aktiengesellschaft (Stock Corporation). In: Kalss S, Nowotny C, Schauer M (eds) Österreichisches Gesellschaftsrecht (Austrian Corporation Law), vol 2. Manz Verlag, Wien

120 121

See Gassner et al. (2010), para 58. Sect. 15 para 2 EU Merger Act.

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Klampfl C (2016) Nachranganleihen und grenzüberschreitende Verschmelzung (Subordinated loans and cross-border merger). GesRZ 216:350 Schindler CP, Stingl H (eds) (2009) Cross-border mergers in CEE/SEE – practitioners’ guide. LexisNexis Verlag ARD Orac Talos T, Winner M (eds) (2016) EU Verschmelzungsgesetz (EU Merger Act), 2nd edn. Verlag Österreich

Georg Gutfleisch works as attorney-at-law in the corporate/M&A team of the Vienna-based law firm Brandl & Talos Rechtsanwälte GmbH. His practice focuses on (international) corporate and commercial law, capital markets law, and banking and finance law. He regularly advises on numerous commercial, civil and employment law projects with Austrian and international clients. One of his main interests is the intersection of traditional fields of law with new technologies and new market developments in the tech industry.

Experiences from the Implementation of the Cross-Border Mergers Directive in Cyprus Thomas Papadopoulos

1 Introduction This chapter reviews the implementation of the Cross-border Mergers Directive1 (hereinafter, “CBMD”) in Cyprus law. It examines the most important provisions of the Cyprus Companies Law (Chapter 113)2 implementing the CBMD. Various aspects of the regulation of cross-border mergers in Cyprus law are discussed. The CBMD was implemented in Cyprus by Law 186(I)/2007.3 This Law amended the Cyprus Companies Law (Chapter 113) and added a new section to it (Arts. 201I– 201X).4 The policy of the Cyprus legislature is to incorporate the various EU company law directives into Cyprus Companies Law (Chapter 113) and not to

1 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. [2005] OJ L 310/1–9 (Cross-border Mergers Directive). This Directive was repealed and codified by EU Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. This codification took place in the interests of clarity and rationality, because Directives 82/891/EEC and 89/666/EEC and Directives 2005/56/EC, 2009/101/EC, 2011/35/EU and 2012/30/EU have been substantially amended several times (Recital 1 of the Preamble). However, this chapter would refer exclusively to the Cross-border Mergers Directive (hereinafter, “CBMD”), which was the EU legal instrument implemented in Cyprus company law. 2 This chapter cites the English translation and consolidation of the Cyprus Companies Law (Chapter 113), which is provided by the Office of the Cyprus Law Commissioner. Office of the Law Commissioner, Nicosia, Cyprus, September (2012) GEN (Α)—L.111. 3 Law 186(I)/2007 amending Cyprus Companies Law (Chapter 113), Paragraph. I (I), No. 4154, 31-12-2007, Official Gazette of the Republic of Cyprus. 4 For an overview of the Cyprus provisions implementing the CBMD, see: Tsadiras (2010), pp. 133–146; Bech-Bruun and Lexidale Study (2013), pp. 309–335; Pafitis (2016), pp. 74–84.

T. Papadopoulos (*) University of Cyprus, Department of Law, Nicosia, Cyprus e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_13

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adopt separate implementing Laws. In this book chapter, all references to articles concern Cyprus Companies Law (Chapter 113), unless otherwise indicated (e.g. articles of the CBMD or of other Directives). Cyprus is a mixed legal system,5 where company law is based on English common law. The law regulating companies in Cyprus, the Cyprus Companies Law (Cap. 113), derives from English Companies Act of 1948. Hence, Cyprus company law is based on English company law.

2 Implementation of the CBMD in Cyprus: A Critical Overview of the Most Important Provisions 2.1

Basic Definitions

Art. 201I provides some basic definitions for the transposition of the CBMD into Cyprus law. It is essential to refer to these basic definitions. First, “cross-border merger of limited-liability companies” is defined as “the merger of limited liability companies, which have been incorporated in accordance with the legislation of a Member State and which have their registered office, their central administration or their principal place of business within the Community, provided that at least two of such companies are governed by the law of different Member States”. The position of a Cyprus company having been initially incorporated abroad at a non-EU country as a foreign company, but having subsequently transferred its seat to Cyprus and having been converted into a Cyprus company, according to Arts 354A–354R, remains obscure, because there is no domestic case law on this issue. Moreover, the situation of a company formed within the EU but having its registered office, central administration, or principal place of business outside of the EU is quite unclear under this definition of Cyprus law, due to lack of domestic case law on this issue.6 Secondly, ““limited-liability company” means: (a) a company of a Member State of the European Union and a Cyprus company, or (b) a company with share capital and having legal personality, possessing separate assets which alone serve to cover its debts and subject under the national law governing it, to conditions concerning guarantees such as are provided for by Directive 68/151/EEC for the protection of the interests of members and others;”. Cyprus did not exercise the option provided by Art. 3(2) of the CBMD to exclude cooperative societies. Hence, Cyprus included cooperative societies within the scope of the definition of “limited liability company” as described by Art. 201I. The Cyprus provisions on cross-border mergers also apply to cooperative societies.7

5

Hatzimihail (2013), pp. 37–96; Symeonides (2003), pp. 441–455. Bech-Bruun and Lexidale Study (2013), p. 316. 7 Tsadiras (2010), p. 134. The following 13 Member States included cooperative societies: Belgium, Cyprus, Czech Republic, Denmark, Finland, France, Greece, Hungary, Iceland, Lichtenstein, Luxembourg, Slovakia and Sweden. Bech-Bruun and Lexidale Study (2013), pp. 100 and 313. 6

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Art. 201I also defines cross-border merger operations and puts them into three categories, according to the CBMD. The first category of cross-border mergers is “one or more limited-liability companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing limited liability company – the acquiring company – in exchange for the issue to their members of securities or shares representing the capital of that acquiring company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares;” The second category of cross-border mergers consists of “(b) two or more limited-liability companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a limited-liability company that they form – the new company – in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10% of the nominal value, or in the absence of a nominal value, of the accounting par value or those securities or shares;”. The third category of cross-border mergers entails the case of “a limited-liability company, on being dissolved without going into liquidation, [which] transfers all its assets and liabilities to the limited-liability company holding all the securities or shares representing its capital.”

2.2

Scope

Regarding the scope of the Cyprus rules on cross-border mergers, Art. 201J (1) states that “Sections 201K–201X shall apply to cross-border mergers of limited liability companies, provided that at least one of the merging limited-liability companies is a Cyprus company or the company resulting from the cross-border merger is a Cyprus company.” Although as a general rule Cyprus law itself does not allow the cash payment in a cross-border merger to exceed 10% of the nominal value (Art. 201B), it allows it only when it “is allowed by the law of the Member State that governs at least one of the merging limited liability companies.” (Art. 201J (2)). In a crossborder merger, the shareholders of a Cyprus company could get a cash payment exceeding 10% of the nominal value, provided the national rules of one of the foreign participating companies allow this kind of cash payment. Otherwise, a Cyprus company participating in a cross-border merger cannot receive a cash payment exceeding 10% of the nominal value.8 Furthermore, companies having as their objective the collective investment of capital provided by the public are excluded from the scope of the Cyprus provisions on cross-border mergers (Art. 201J (3)).

8

Tsadiras (2010), p. 135.

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Company Types and Applicable Law

Art. 201K specifies certain very important conditions relating to cross-border mergers. Art. 201K (1) allows cross-border mergers only between certain types of companies, which could merge under the domestic law of the relevant Member States. Moreover, this provision clearly states that every Cyprus company may take part in a cross-border merger.9 Nevertheless, this article exempts Cyprus limitedliability companies by guarantee and Cyprus companies in liquidation from the possibility to conduct a cross-border merger.10 Art. 201K (2) determines the law applicable to cross-border mergers. This is one of the most important provisions. According to this provision, “a Cyprus company taking part in a cross-border merger shall comply with the provisions of this Law, including those concerning the decision-making process relating to the merger, the protection of creditors of the merging companies, debenture holders and the holders of securities or shares.” Special emphasis is given on the provisions aiming at the protection of minority shareholders in cross-border mergers: “for the purpose of protecting minority members who have opposed the cross-border merger, section 201 of this Law shall apply mutatis mutandis.” (Art. 201K (3)).

2.4

Procedure

There are also some provisions regulating the various procedural steps of a crossborder merger. Art. 201L focuses on the common draft terms of cross-border merger, which must be prepared by the directors of each of the Cyprus merging companies and which list the various particulars that must be included. With regard to publication, Art. 201M regulates filing before the Registrar of Companies of the common draft terms of the cross-border merger, the relevant exemption and specific particulars for each of the merging companies, which shall be published in the Official Gazette of the Republic of Cyprus. Art. 201N focuses on the preparation and disclosure of the directors’ report “explaining and justifying the legal and economic aspects of the cross-border merger and explaining the implications of the crossborder merger for members, creditors and employees.” Moreover, Art. 201O designates the requirement for an independent expert report, the possibility of single written report as an alternative, its particulars and the possibility of waiver (if “all the

9 With regard to classification of companies, Cyprus company law includes the corporate type of company limited by shares and company limited by guarantee, which could be either public or private company. The classification of companies in Cyprus company law follows the same pattern with the classification of companies in English company law. Worthington (2016), pp. 21–22. 10 The following five Member States excluded companies in liquidation from the possibility to participate in a cross-border merger: Cyprus, Hungary, Romania, Slovakia, and the United Kingdom. Bech-Bruun and Lexidale Study (2013), p. 109.

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members of each of the companies involved in the cross-border merger have so agreed”). With regard to the approval by the general meeting, “the general meeting of each of the merging Cyprus companies shall decide on the approval of the common draft terms of cross-border merger” (Art. 201P(1)). In addition to that, “the general meeting shall expressly indicate whether it approves the possibility for the members of any of the other merging non-Cyprus limited liability companies to have recourse to a procedure prescribed by the national legislation that governs that merging company which allows for the scrutiny and amendment of the ratio applicable to the exchange of securities or shares, or a procedure which allows for the compensation of minority members, without preventing the registration of the cross-border merger: Provided that the decision resulting from the application of the procedure shall be binding on the limited-liability company resulting from the cross-border merger and on all its members.” (Art. 201P(3)). Art. 201Q is dedicated to the pre-merger certificate: “(1) The District Court of the district where the registered office of each of the merging Cyprus companies is situated shall be competent to scrutinize the legality of the cross-border merger as regards that part of the procedure which concerns each of the merging Cyprus companies. (2) Each of the merging Cyprus companies concerned shall apply to the Court referred to in subsection (1), requesting a certificate conclusively attesting to the proper completion of the pre-merger acts and formalities. (3) The District Court, if satisfied that the provisions of sections 201IL–201P are observed shall issue, without delay, to each Cyprus merging company, the certificate referred to in subsection (2). (4) The District Court may issue the certificate referred to in subsection (2), even if the procedure referred to in section 201P(3) has commenced from any other merging limited-liability non-Cyprus company: Provided that, in this case, the Court must indicate on the certificate that the procedure is pending.” Another crucial step for the successful completion of a cross-border merger is the scrutiny of the legality of the cross-border merger. Art. 201R (1) states: “where the limited-liability company resulting from the cross-border merger is governed by this Law, the District Court of the district where the registered office of the said company is situated shall be competent to scrutinize the legality of the cross-border merger as regards that part of the procedure which concerns the completion of the cross-border merger and, where appropriate, the formation of the new company resulting from the cross-border merger.”11 The District Court must assure that the common draft terms of cross-border merger have been approved in the same terms and that the employee participation requirements are carried out (Art. 201R (2)). The completion of

11 In the feedback provided from Cyprus stakeholders at the Study, it was noted that, in a crossborder merger involving a Cyprus merging company, the competent Court of one of the foreign merging companies demanded merging companies from other Member States to comply with certain company law rules of this Court’s law. Bech-Bruun and Lexidale Study (2013), p. 188.

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scrutiny of the legality of the cross-border merger demands the submission to the District Court of both the pre-merger certificate and the common draft terms of crossborder merger as approved by the general meeting (Art. 201R (3)). According to Art. 201R (4), as soon as the District Court is satisfied that the process with regard to the completion of the cross-border merger is lawful, it must issue a decision approving the completion of the cross-border merger and must authorize the entry into force of the cross-border merger. Art. 201S regulates the entry into effect of the cross-border merger: “The crossborder merger shall take effect from the date of its entry into effect which is determined in the decision made by the District Court in accordance with section 201R or where the authority competent to approve the completion of the crossborder merger is the authority of another Member State in accordance with the provisions of Art. 11 of Directive 2005/56/EC the cross-border merger shall commence to take effect on the date determined by the national legislation for the purposes of Art. 12 of Directive 2005/56/EC.” Moreover, certain registration formalities related to the completion of the cross-border merger are specified by Art. 201T. According to Art. 201U(2), the completion and entry into effect of the crossborder merger results in certain consequences: (a) all the assets and liabilities of the company being acquired or of the merging companies shall be transferred to the acquiring company or to the new company; (b) the members of the company being acquired or of the merging companies shall become members of the acquiring company or of the new company; (c) the company being acquired or the merging companies shall cease to exist. Art. 201U(3) concerns compliance with company law, which is another very important consequence of the cross-border merger: “the limited-liability company resulting from the cross-border merger shall comply with the formalities required by this Law or in the case of the merging limited-liability non-Cyprus companies the laws to which such companies are subject to, as regards the completion of special formalities before the transfer of certain assets, rights and obligations by the merging companies becomes effective against third parties.” There are also other provisions dealing with some other procedural aspects of cross-border mergers. Art. 201V introduces simplified formalities, “where a crossborder merger by acquisition is carried out by a Cyprus company which holds all the shares and all other securities conferring the right to vote at general meetings of the company or companies being acquired”.12 Additionally, Art. 201W coordinates employee participation issues.13 Regarding the validity, Art. 201X states that: “a cross-border merger which has taken effect as provided for in Art. 201S may not be

12 Two possibilities of waiving the independent experts’ report exist under Art. 201V(1)–(2). Another possibility of waiving the independent experts’ report exists under Art. 201O(5). Tsadiras (2010), p. 138. 13 Tsadiras (2010), pp. 143–145. For an analysis of employee participation in the CBMD, see: Tepass (2012), pp. 123–142; François and Hick (2010), pp. 29–43; Storm (2010), pp. 74–78; Pannier (2005), pp. 1424–1442; Storm (2006), pp. 130–138; Αργυρóς (2007), pp. 321–334; Argyros (2007), pp. 321–334 (in Greek).

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declared null and void.” This latter provision contributes clearly towards legal certainty.

3 The Multi-Level Regulatory Model of the CBMD The CBMD adopts a complicated multi-level regulatory model, according to which the CBMD refers to certain provisions of national law. Art. 4(1)(b) of the CBMD states that: “a company taking part in a cross-border merger shall comply with the provisions and formalities of the national law to which it is subject”. Art. 4(2) of the CBMD states that: “The provisions and formalities referred to in paragraph 1 (b) shall, in particular, include those concerning the decision-making process relating to the merger and, taking into account the cross-border nature of the merger, the protection of creditors of the merging companies, debenture holders and the holders of securities or shares, as well as of employees as regards rights other than those governed by Art. 16. A Member State may, in the case of companies participating in a cross-border merger and governed by its law, adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger.” Hence, it is easily understood that regulation of cross-border mergers is based on a cumulative application of national laws implementing the CBMD and of other provisions of national laws including provisions on domestic mergers. The provisions on domestic mergers derive primarily from national provisions implementing the Third Company Law Directive on Domestic Mergers (Domestic Mergers Directive, hereinafter, “DMD”)14 and from other national provisions adopted by the Member State, but not prescribed by the directive.15 This cumulative application might be a source of vagueness. The multilevel regulatory regime on the basis of a cumulative application of the relevant rules does not contribute to legal certainty. This vagueness could create problems to companies participating in cross-border mergers, as well as to the relevant supervisory and regulatory authorities, which must be aware of the applicable rules in advance. This problem could be solved through an appropriate ranking of the relevant rules applicable to a cross-border merger. The cumulative application of the relevant rules asks for a ranking. The relevant rules applicable to a cross-border merger must be ranked in order to contribute to legal certainty and to facilitate compliance of parties involved in such a merger. The

14

The Third Council Directive 78/855/EEC was repealed and replaced by Directive 2011/35/EU. Directive 2011/35/EU was repealed and codified by Directive 2017/1132. Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies [1978] OJ L 295/36–43. Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies [2011] OJ L 110/1–11. Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. 15 van Eck and Roelofs (2011), p. 17.

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ranking of rules applicable to cross-border mergers must be formed according to certain criteria. All provisions regulating cross-border mergers are based on the national rules implementing the CBMD and on the national rules implementing the DMD, to which the CBMD refers.16 The national provisions implementing the CBMD enjoy priority, as lex specialis, over the national provisions implementing the DMD, which is lex generalis. First, the main provisions regulating cross-border mergers are the provisions implementing the CBMD. In case of conflicting provisions, a provision, which is specifically addressed to one merging company, has priority over a provision, which is addressed to all merging companies. Moreover, in case of conflicting provisions, a national provision implementing a mandatory provision of the CBMD has priority over a national provision implementing on a voluntary basis an optional provision of the CBMD.17 Secondly, cross-border mergers are also regulated by national provisions implementing the DMD. National provisions implementing on a voluntary basis optional provisions of the DMD have only supplementary effect. These provisions are applicable only to the extent that they do not create cross-border inconsistencies and conflicts. The same conclusions about priorities mentioned above also apply here. In case of conflicting provisions, a provision, which is specifically addressed to one merging company, has priority over a provision, which is addressed to all merging companies. Moreover, in case of conflicting provisions, a national provision implementing a mandatory provision of the DMD has priority over a national provision implementing on a voluntary basis an optional provision of the DMD.18 Thirdly, there are national provisions implementing company law directives other than the CBMD and the DMD, such as the Second Company Law Directive, as well as other national company law provisions without a European company law origin, but with a pure national company law nature. These national provisions apply only as long as they do not conflict with the CBMD and the DMD and do not result in cross-border inconsistencies and conflicts. The arguments on priorities mentioned above also apply here.19 Fourthly, the cumulative application of the provisions of national law of one Member State (deriving from the CBMD, the DMD, as well as other national company law provisions with or without a European company law origin) should not result in the cumulative application of contradictory provisions of a Member State to a merging company subjected to the law of another Member State.20 These provisions of a Member State should apply to its own merging companies, but not to companies of other Member States. Otherwise, there is always a danger for

16

van Eck and Roelofs (2011), p. 21. See, also: Ntzoufas (2006), pp. 811–812. van Eck and Roelofs (2011), p. 22. See, also: Grundmann (2012), p. 703. 18 van Eck and Roelofs (2011), p. 22. 19 van Eck and Roelofs (2011), p. 22. 20 van Eck and Roelofs (2011), p. 22. 17

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contradictions, conflicts, deficiencies and inconsistencies from this application to companies of other Member States. Fifthly, the application of other national provisions, which fall outside the scope of European company law, presupposes that these national provisions are compatible and do not clash with the CBMD, the DMD and with other company law directives, such as the Second Company Law Directive. Avoidance of cross-border inconsistencies, controversies and uncertainty is a prerequisite for the application of these national provisions. Their contribution towards the protection of stakeholders involved in a cross-border merger (protection of minority shareholders, creditors, and employees), which is one of the main goals of the CBMD, is another prerequisite.21 Sixthly, the overarching effect of CJEU’s case law on cross-border mergers as an exercise of EU freedom of establishment should be taken into account. The CBMD is a minimum harmonization legal instrument. Where a directive only determines a minimum standard, Member States can adopt stricter provisions. In these cases, the implementing provisions are scrutinized on the basis of the Treaty provisions on the fundamental freedoms.22 After SEVIC,23 national regulations that exceed the minimum standards of the CBMD became subject to scrutiny, since they might be restrictions on a fundamental freedom. Without the effect of SEVIC, Member States would have needed to comply only with the minimum standards of the Directive, and would have been free to adopt more restrictive national laws in order to protect their national interests or to pursue other policy objectives (national legislation is found between the Directive’s ‘floor’ and the fundamental freedom’s “ceiling”).24 Any national provision stricter than the Directive’s provision must fulfil the conditions of the ‘Gebhard Test’.25 This latter requirement was declared by Recital 3 of the Preamble of the CBMD. Art. 4 (2) of the CBMD focuses on creditor protection and on protection of minority shareholders. The protection of these two categories of stakeholders in cross-border mergers is based on the legal frameworks, which apply to domestic mergers. These legal frameworks of Member States for the protection of these two categories of stakeholders are different for each Member State and are not harmonized by the CBMD, which leads to diversity.26 Obviously, the outcome of this legal diversity is that creditors and minority shareholders involved in cross-border mergers enjoy different levels of protection. This situation results in confusion and

21

van Eck and Roelofs (2011), p. 22. Andenas et al. (2005), p. 783. 23 Case C-411/03 SEVIC Systems AG EU:C:2005:762. 24 Angelette (2006), p. 1214. 25 Angelette (2006), p. 1214. Case C-55/94 Reinhard Gebhard v Consiglio dell'Ordine degli Avvocati e Procuratori di Milano EU:C:1995:411. 26 European Company Law Experts (ECLE) (2012), p. 8. 22

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legal uncertainty about the conditions under which the cross-border mergers would be carried out and completed.27

4 The Multi-Level Regulatory Model in the Implementation of the CBMD in Cyprus: Decision-Making Process, Creditor Protection and Protection of Minority Shareholders 4.1

Introduction

This complicated multi-level regulatory model for cross-border mergers is reflected clearly in the implementation of the CBMD in Cyprus. Art. 201K (2) states that: “A Cyprus company taking part in a cross-border merger shall comply with the provisions of this Law, including those concerning the decision-making process relating to the merger, the protection of creditors of the merging companies, debenture holders and the holders of securities or shares.” Moreover, Art. 201K (3) states that: “For the purpose of protecting minority members who have opposed the crossborder merger, section 201 of this Law shall apply mutatis mutandis.” Hence, Cyprus legislature did not adopt autonomous provisions for the decision-making process, creditor protection and protection of minority shareholders in cross-border mergers. The relevant provisions on domestic mergers and on schemes of arrangement apply by analogy to cross-border mergers. This approach is compatible with the CBMD.28 The DMD and the Sixth Company Law Directive on Domestic Divisions29 were implemented in Cyprus by Law 70(I) of 2003. Law 70(I) of 2003 introduced Arts. 201A–201H. The decision-making process, creditor protection and protection of minority shareholders in cross-border mergers are based by analogy on the relevant provisions on domestic mergers and on schemes of arrangement. The relevant provisions on domestic mergers also do not have autonomous provisions on the decision-making process, creditor protection and protection of minority shareholders. The relevant provisions on domestic mergers refer to Section “Arrangements and Reconstructions” of Cyprus Companies Law (Chapter 113) (Arts 198–201). This section is dedicated to schemes of arrangement in Cyprus company law, which follow the rationale of schemes of arrangement in

27

European Company Law Experts (ECLE) (2012), p. 8. Art. 4 (1) (b) of the CBMD states that “a company taking part in a cross-border merger shall comply with the provisions and formalities of the national law to which it is subject.” 29 Sixth Council Directive 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies [1982] OJ L 378/47–54. Repealed and codified by Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law [2017] OJ L 169/46–127. 28

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English company law. With regard to decision-making process and creditor protection, the provision on cross-border mergers refers to the provisions on domestic mergers, which refer subsequently to the provisions on schemes of arrangement (Art. 201K (2)). With regard to the protection of minority shareholders, the relevant provision on cross-border mergers refers directly to the relevant provision on schemes of arrangement (Art. 201K (3)). It is easily understood that this results in a multi-level regulatory system for the regulation of cross-border mergers in Cyprus law. This multi-level regulatory regime is aggravated by the fact that domestic mergers are not regulated in Cyprus law by autonomous provisions, but they refer to the pre-existing section on arrangements and reconstructions. This section on arrangements and reconstructions pre-existed the implementation of the DMD and the CBMD in Cyprus law, which accompanied the accession of Cyprus to the EU. Cyprus joined the EU in 2004 and had to implement the DMD as part of the EU acquis. Later, in 2007, 3 years after its accession, Cyprus implemented the CBMD. Mergers were available in Cyprus law before the implementation of the DMD and the CBMD. The section on arrangements and reconstructions of the Cyprus Companies Law (Chapter 113) allowed mergers and takeovers through schemes of arrangements. The possibility to proceed to a merger through a scheme of arrangement is available in parallel with the provisions allowing cross-border and domestic mergers. This possibility to carry out a merger through a scheme of arrangement is supported by the fact that the provisions on cross-border and domestic mergers of the Cyprus Companies Law (Chapter 113) refer to the section on arrangements and reconstructions for certain procedural issues and for the protection of certain stakeholders. This reference to the section on arrangements and reconstructions of the Cyprus Companies Law (Chapter 113) clearly exhibits that certain aspects of the procedure are identical between (cross-border and domestic) mergers and schemes of arrangement.

4.2

“Arrangements and Reconstructions” in Cyprus Companies Law (Chapter 113)

The possibility of arrangements and reconstructions in Cyprus Companies Law (Chapter 113) is based on the power to compromise or to reach an arrangement with creditors and shareholders. Art. 198 (1) states that: “Where a compromise30 or arrangement31 is proposed between a company and its creditors or any class of them

A “compromise” requires “a difficulty or dispute, which the scheme seeks to resolve.” Sneath v Valley Gold Ltd [1893] 1 Ch 477; Re NFU Development Trust Ltd [1972] 1 WLR 1548. Gullifer and Payne (2011), p. 620. 31 The term “arrangement” has a wider meaning than “compromise”. Although English case law has not defined this term, an arrangement must be characterized by “give and take and not simply 30

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or between the company and its members or any class of them, the Court may, on the application in a summary way of the company or of any creditor or member of the company, or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the Court directs.” With regard to the meeting of the creditors or of the shareholders of the company, Art. 198 (2) states: “If a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.” Art. 198 (5) explains further aspects of the process of arrangements and reconstructions: “In this and in section 199 the expression ‘company’ means any company liable to be wound up under this Law, and the expression ‘arrangement’ includes a reorganization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods.” A scheme of arrangement entails a compromise or an arrangement between a company and its creditors or its shareholders, which aims at the manipulation of a company’s capital.32 The Cyprus Companies Law (Chapter 113) does not prescribe the subject matter of the scheme of arrangement; a scheme could constitute a compromise or arrangement between a company and its shareholders or creditors about any kind of agreement they could possibly reach between themselves.33 As long the conditions of procedural framework of a scheme of arrangement are fulfilled, a scheme could be used by a company for any kind of internal reorganization, merger/amalgamation and divisions; schemes of arrangement could constitute effective mechanisms for managing and shaping a company’s capital.34 Hence, schemes of arrangement could be used as a mechanism for carrying out mergers. Apart from mergers, schemes of arrangement could also be used as alternatives to takeovers, reorganizations of the share capital within a company, materializing an

amount to a surrender or confiscation”. Moreover, the company has to be a party to the arrangement. Taking into account these characteristics, case law did not choose to give this term a narrow meaning. Re Lehman Brothers International (Europe) (in administration)(No 2) [2009] EWCA Civ 1161; [2010] BCC 272, [74], Re Savoy Hotel Ltd [1981] Ch 351, 359–61 per Nourse J; Re NFU Development Trust Ltd [1972] 1 WLR 1548. Re National Bank Ltd [1966] 1 WLR 819, 829 per Plowman J; Re T & N Ltd [2006] EWHC 1447 (Ch); [2007] 1 BCLC 563, [46]–[50] per David Richards J. Gullifer and Payne (2011), p. 620. See, also: Davies and Worthington (2012), pp. 1107–1108. 32 Gullifer and Payne (2011), p. 619. 33 Gullifer and Payne (2011), p. 619. 34 Gullifer and Payne (2011), p. 619.

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arrangement between the company and its creditors in both solvent or insolvent companies and together with a wind up or as an alternative to it.35

4.3

Creditor Protection in Cross-Border Mergers and Schemes of Arrangement

Creditor protection in cross-border mergers is based on the relevant provisions on domestic mergers. However, the relevant provisions on creditor protection in domestic mergers refer to a specific article on creditor protection in schemes of arrangement (Art. 200 (1) (e)). With regard to domestic mergers, Art. 201D on protection of third parties and protection of creditors and holders of debentures states: “(1) (a) As regards the protection of the creditors in relation to their claims created before the publication of the draft terms provided for in section 201C and which have not fallen due as at the date of publication, paragraph (e) of subsection (1) of section 200 shall be applicable. (b) The order to be issued by the Court must provide for an obligation of the participating companies to provide suitable guarantees to the creditors when(i) the financial status of the merging companies (in the case of merger by acquisition or by formation of new company) or of the company being divided as well as the company which in accordance with the draft terms of division shall undertake the obligation towards the creditors (in the case of division) render this protection mandatory, and (ii) provided that the said creditors do not already have similar safeguards: Provided that the creditors are entitled to apply to the District Court for adequate safeguards if they can credibly demonstrate that, due to the merger, the satisfaction of their claims is at stake and that no adequate safeguards have been obtained from the company.36 [. . .] (2) (a) As regards the protection of holders of debentures of the merging companies, or of the companies involved in the division, paragraph (e) of subsection (1) of section 200 shall be applicable, except where the merger or division has been approved by a meeting of the holders of debentures pursuant to the procedure provided for in subsection (2) of section 198, or by the holders themselves, individually. [. . .]” [Emphasis added]

35

Gullifer and Payne (2011), p. 619. See, also: Davies and Worthington (2012), pp. 1105–1108. The same provision also exists in the following jurisdictions: Art. 201D Cyprus Companies Law; Art. 4338 of the CC (Estonia); Art. 8(2) Law 3777/2009 (Greece); Art. 351i paragraph 1 PGR (Liechtenstein); Art. 66 of the Law on Companies (Lithuania); Art. 516 CPCC (Poland); Arts. 251 and 243 Company Law (Romania); Art. 44.1 of the SML (Spain). Bech-Bruun and Lexidale Study (2013), p. 57. 36

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It should be stressed that creditors do not have the power to exercise a veto and to block the cross-border merger.37 Art. 200 (1) (e) pays special attention to the protection of persons dissenting from the compromise or arrangement, which results in a merger. The same protection also applies to persons disagreeing with a cross-border or domestic merger. This process encompasses also creditors, who have not received adequate and suitable guarantees. Art. 200(1)(e) is adjusted to creditor protection in mergers. Dissenting persons of Art. 200(1)(e) are equated with creditors without safeguards, who might disagree with the merger. Art. 200 (1) states: “Where an application is made to the Court under section 198 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court that the compromise or arrangement has been proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies, and that under the scheme the whole or any part of the undertaking or the property of any company concerned in the scheme (in this section referred to as “a transferor company”) is to be transferred to another company (in this section referred to as “the transferee company”), the Court may, either by the order sanctioning the compromise or arrangement or by any subsequent order, make provision for all or any of the following matters(a) the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company; (b) the allotting or appropriation by the transferee company of any shares, debentures, policies or other like interests in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person; (c) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; (d) the dissolution, without winding up, of any transferor company; (e) the provision to be made for any persons, who within such time and in such manner as the Court directs, dissent from the compromise or arrangement; (f) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.” [Emphasis added] Schemes of arrangement also affect the transfer of property or liabilities. Art. 200 (2) clarifies this issue: “Where an order under this section provides for the transfer of property or liabilities, that property shall, by virtue of the order, be transferred to and vest in, and those liabilities shall, by virtue of the order, be transferred to and become the liabilities of, the transferee company, and in the case of any property, if the order so directs, freed from any charge which is by virtue of the compromise or arrangement to cease to have effect.” Art. 200 (4) provides the

37

Bech-Bruun and Lexidale Study (2013), p. 319.

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essential definition: “In this section the expression “property” includes property, rights and powers of every description, and the expression “liabilities” includes duties.” With regard to creditor protection, an interesting case study involving a crossborder merger between a Bulgarian and a Cyprus company was discussed in the feedback provided from Bulgarian stakeholders at the “Study on the Application of the Cross-Border Mergers Directive” (hereinafter the ‘Study’) prepared by BechBruun and Lexidale for the European Commission. While Bulgarian law requires separate management of the assets and liabilities of the merging companies aiming at creditor protection, Cyprus law does not have such rules. This difference poses difficulties to the completion of a cross-border merger between a Bulgarian and a Cyprus company.38

4.4

Decision-Making Process

Art. 201C(5) focuses on the decision-making process for domestic mergers, which also apply to cross-border mergers: “The reorganization shall be decided upon by the general meeting of each participating company, applying subsection (2) of section 198 as to voting and to the extent the decision entails the amendment of the articles, applying by way of supplementation to the provisions as to the amendment of the articles:”.39 Moreover, mergers by acquisition of one or more companies by a company which holds 90% or more, but not all, of the shares follow a simplified procedure and are exempted from the requirement of approval by the general meeting of the acquiring company.40 It is easily understood that the regulation of domestic mergers does not have autonomous provisions for the decision-making process. The domestic mergers provision (Art. 201C(5)) refers to the relevant article on schemes of arrangement (Art. 198(2)).

38

Bech-Bruun and Lexidale Study (2013), p. 186. For the amendment of the articles of association, see Art. 12 of the Cyprus Companies Law on the alteration of articles of association by special resolution. Tsadiras (2010), p. 140. 40 Art. 201C(5) “. . .Provided, that in the event of merger by acquisition of one or more companies by a company which holds 90% or more, but not all, of the shares conferring the right to vote at general meetings of the company being acquired, the approval of the general meeting of the acquiring company shall not be required if the following conditions are fulfilled: (i) there has been a publication in accordance with section 365A at least one month before the day of calling the general meeting of the acquiring company or of the companies being acquired which are to decide on the common draft terms of the merger, (ii) all the shareholders of such company, at least one month before the day of calling the general meeting, have the right to have knowledge, at its registered office, of the documents referred to in paragraphs (a), (b), and, as the case may be, (c), (d), and (e) of subsection (4) of section 201C, subject to its provisions, (iii) one or more shareholders of the acquiring company, holding at least 5% of the subscribed capital, have the right to call a general meeting of the acquiring company, which is to decide on the common draft terms of the merger:. . .” 39

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With regard to the general meeting, the relevant provision from the section on arrangements and reconstructions applies to cross-border mergers. The cross-border mergers provision (Art. 201K (2)) refers to the domestic mergers provision (Art. 201C(5)), which further refers to the provision on schemes of arrangement (Art. 198 (2)). The regulation of decision-making process in cross-border mergers is a characteristic example of this multi-level regulatory system, which applies to the implementation of the CBMD in Cyprus law. Art. 198 (2) states: “If a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.”41 Art. 198 (5) explains further aspects of the process of arrangements and reconstructions: “In this and in section 199 the expression ‘company’ means any company liable to be wound up under this Law, and the expression ‘arrangement’ includes a reorganization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods.” When the general meeting of the Cyprus merging company approves the common draft terms of the cross-border merger, this decision is binding to all shareholders, including the minority shareholders, who disagreed with it.42

4.5

Protection of Minority Shareholders: Schemes of Arrangement and Other Legal Bases in Cyprus Companies Law (Chapter 113)

Art. 201 dedicated to the protection of minority shareholders in schemes of arrangement also applies by analogy to cross-border mergers. The rights deriving from Art. 201 are extended through Art. 201K (3) to cross-border mergers.43 A cross-border mergers provision (Art. 201K (3)) refers directly to a provision on schemes of arrangement (Art. 201). This reference exhibits the multi-level regulatory model in the implementation of the CBMD in Cyprus. Moreover, Art. 201 of Cyprus Companies Law (Chapter 113) is based on Art. 209 of UK Companies Act of 1948.44 Art.

41

The merger resolution is considered to be a special resolution with majority of at least 3/4 of the members. Tsadiras (2010), p. 140. 42 Tsadiras (2010), p. 142. 43 Art 201K (3) states that: “For the purpose of protecting minority members who have opposed the cross-border merger, section 201 of this Law shall apply mutatis mutandis.” 44 Tsadiras (2010), p. 142.

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201 provides the possibility of squeeze-out rights45 and sell-out rights/appraisal rights46 in schemes of arrangement and, as a matter of fact, in cross-border mergers.47 These are exit rights. Dissenting shareholders48 of merging companies could exit voluntarily or involuntarily from the company on fair and equal terms with the rest of the shareholders, who agreed to the cross-border merger. With regard to the squeeze-out right, the company resulting from the cross-border merger (either a new company or one of the merging companies) could demand the acquisition of the shares of dissenting minority shareholders. The acquisition of shares through a squeeze-out right does not require the consent of the dissenting minority shareholder; the dissenting minority shareholder is obliged to sell his shares to the resulting company. The shares are acquired at a fair price, which is equivalent to the price provided for the transfer of shares. Art. 201 (1) states: “Where a scheme or contract involving the transfer of shares or any class of shares in a company (in this section referred to as “the transferor company”) to another company, whether a company within the meaning of this Law or not (in this section referred to as “the transferee company”), has, within 4 months after the making of the offer in that behalf by the transferee company been approved by the holders of not less than ninetenths in value of the shares whose transfer is involved (other than shares already held at the date of the offer by, or by a nominee for, the transferee company or its subsidiary), the transferee company may, at any time within 2 months after the expiration of the said 4 months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares, and when such a notice is given the transferee company shall, unless on an application made by the dissenting shareholder within 1 month from the date on which the notice was given the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company: Provided that where shares in the transferor company of the same class or classes as the shares whose transfer is involved are already held as aforesaid to a value greater than one-tenth of the aggregate of their value and that of the shares (other This is similar to freeze-out. Freeze-out is defined as “a transaction in which a controlling shareholder forces out the minority shareholders and compensates them in cash or stock.” Krebs (2012), pp. 941–978, 941. 46 ‘Appraisal rights’ or ‘withdrawal rights’ are defined as various rules allowing a shareholder to receive a ‘fair value’ for his shares in case of certain change of control transactions (corporate restructuring techniques, such as mergers, divisions or sales of assets) and other fundamental changes in the company (e.g., amendments to the certificate of incorporation, including transfer of the company seat abroad, delisting of the shares). Papadima (2015), p. 188. 47 Arts. 15–16 of the Takeover Bids Directive introduce also squeeze-out and sell-out rights to the takeover process. Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids [2004] OJ L 142/12–23. 48 Art. 201(5) defines “dissenting shareholders”: “In this section the expression “dissenting shareholder” includes a shareholder who has not assented to the scheme or contract and any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.” 45

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than those already held as aforesaid) whose transfer is involved, the foregoing provisions of this subsection shall not apply unless(a) the transferee company offers the same terms to all holders of the shares (other than those already held as aforesaid) whose transfer is involved, or, where those shares include shares of different classes, of each class of them; and (b) the holders who approve the scheme or contract, besides holding not less than nine-tenths in value of the shares (other than those already held as aforesaid) whose transfer is involved, are not less than three-fourths in number of the holders of those shares.” Art. 201 (2) introduces a sell-out right for dissenting minority shareholders, who could ask the company to acquire their shares. This appraisal remedy assists minority shareholders to exit the company after the cross-border merger by selling their shares at a fair price, which is equivalent to the price provided for the transfer of shares. Art. 201 (2) states: “Where, in pursuance of any such scheme or contract as aforesaid, shares in a company are transferred to another company or its nominee, and those shares together with any other shares in the first-mentioned company held by, or by a nominee for, the transferee company or its subsidiary at the date of the transfer comprise or include nine-tenths in value of the shares in the first-mentioned company or of any class of those shares, then(a) the transferee company shall within 1 month from the date of the transfer (unless on a previous transfer in pursuance of the scheme or contract it has already complied with this requirement) give notice of that fact in the prescribed manner to the holders of the remaining shares or of the remaining shares of that class, as the case may be, who have not assented to the scheme or contract; and (b) any such holder may within 3 months from the giving of the notice to him require the transferee company to acquire the shares in question; and where a shareholder gives notice under paragraph (b) of this subsection with respect to any shares, the transferee company shall be entitled and bound to acquire those shares on the terms on which under the scheme or contract the shares of the approving shareholders were transferred to it, or on such other terms as may be agreed or as the Court on the application of either the transferee company or the shareholder thinks fit to order.” The squeeze-out process of Art. 201(1) is facilitated by Art. 201(3). As far the terms of Art. 201(1) are fulfilled, the transferor company is obliged to register the transferee company as the holder of the shares of the dissenting shareholder. This obligatory registration of shares entails the transfer of shares from the dissenting shareholder to the transferee company. This automatic registration process is independent of the volition of the dissenting shareholder. The agreement of the dissenting shareholder to this registration is not essential, because the acquisition of shares through a squeeze-out right does not require the consent of the minority shareholder. Hence, the whole process is simplified through this automatic registration entailing a share transfer. In case of an inactive dissenting minority shareholder, Art. 201(3) facilitates the exercise of squeeze-out right on behalf of the

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transferee company (e.g. dissenting minority shareholders might be inactive, because they possess a very small stake or are not engaged with their shareholding for various reasons). Art. 201(3) states: “Where a notice has been given by the transferee company under subsection (1) and the Court has not, on an application made by the dissenting shareholder, ordered to the contrary, the transferee company shall, on the expiration of one month from the date on which the notice has been given, or, if an application to the Court by the dissenting shareholder is then pending, after that application has been disposed of, transmit a copy of the notice to the transferor company together with an instrument of transfer executed on behalf of the shareholder by any person appointed by the transferee company and on its own behalf by the transferee company, and pay or transfer to the transferor company the amount or other consideration representing the price payable by the transferee company for the shares which by virtue of this section that company is entitled to acquire, and the transferor company shall thereupon register the transferee company as the holder of those shares: Provided that an instrument of transfer shall not be required for any share for which a share warrant is for the time being outstanding.”49 Cyprus Companies Law (Chapter 113) provides also an additional way of protecting minority shareholders. Art. 202 is a general company law mechanism aiming at the protection of minority shareholders. This provision might also be invoked in cross-border mergers. It is based on Art. 210 of UK Companies Act of 1948.50 Art. 202 offering an alternative remedy to winding up in cases of oppression of minority shareholders states: “(1) Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself) or, in a case falling within subsection (3) of section 163, the Council of Ministers may cause an application to be made to the Court by petition for an order under this section. (2) If on any such petition the Court is of opinion(a) that the company’s affairs are being conducted as aforesaid; and (b) that to wind up the company would unfairly prejudice that part of the members, but otherwise the facts would justify the making of a windingup order on the ground that it was just and equitable that the company should be wound up, the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company’s affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the

49 Art. 201 (4) regulates the consideration received by the transferor company on behalf of the dissenting shareholder for the transfer of shares of the dissenting shareholder to the transferee company: “Any sums received by the transferor company under this section shall be paid into a separate bank account, and any such sums and any other consideration so received shall be held by that company on trust for the several persons entitled to the shares in respect of which the said sums or other consideration were respectively received.” 50 Tsadiras (2010), p. 142.

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company and, in the case of a purchase by the company, for the reduction accordingly of the company’s capital, or otherwise.[. . .]” There are also some other provisions aiming at the protection of minority shareholders. These provisions are found in Art 201C, which is a domestic mergers provision. The application of this specific domestic mergers provision to crossborder mergers underpins the multi-level regulatory model in the implementation of the CBMD in Cyprus. According to Art. 201C(1)(b)(vi), the draft terms of the merger must list “the rights conferred by the acquiring company or the recipient companies on the shareholders with special rights and the beneficiaries of titles other than shares, or the measures proposed for them”. Art. 201C(4) gives the right to each shareholder of the participating companies, including minority shareholders, to inspect certain documents, such as the draft terms and the accounts. Art. 201C (8) simplifies the merger process and exempts from specific requirements (Art. 201C(2), (3), (4))51 the case of cross-border merger by absorption of one or more companies by another company, which owns 90% or more, but not all, of the shares giving the right to vote in general meetings. Art. 201C(7) prescribes an exception to certain requirements of the merger process, as long as minority shareholders are granted an appraisal right.52 When this appraisal right is exercised and there is a disagreement about the value of the shares, the Court could determine this value. This is a provision addressed to domestic mergers, but it might also catch by analogy cross-border mergers. The exception concerns the directors’ report explaining and justifying the draft terms of a merger from a legal and economic aspect and, in particular, the share exchange ratio (Art. 201C(2)), the independent experts’ valuation report (stating whether the share exchange ratio is fair and reasonable or not) (Art. 201C(3)), the inspection of each shareholder of the participating companies of certain documents before the general meeting (Art. 201C(4)).53

51

The exception concerns the directors’ report explaining and justifying the draft terms of merger from a legal and economic aspect and, in particular, the share exchange ratio (Art. 201C(2)), the independent experts’ valuation report (stating whether the share exchange ratio is fair and reasonable or not) (Art. 201C(3)), the inspection of each shareholder of the participating companies of certain documents before the general meeting (Art. 201C(4)). 52 See, also Kraakman et al. (2017), pp. 189–190. 53 Art. 201C(7) states: “In the event of merger by acquisition of one or more companies by a company which holds 90% or more, but not all, of the shares conferring the right to vote at general meetings of the company being acquired, the requirements of subsections (2), (3) and (4) shall not be required if the following conditions are fulfilled: (a) the minority shareholders of the company being acquired may exercise the right to redeem their shares on behalf of the acquiring company; (b) in this case, the minority shareholders shall have a claim which is equivalent to the value of their shares; in the event of disagreement, this sum shall be determined by the court.”

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5 Cross-Border Mergers and Cyprus Case Law on Schemes of Arrangement There is no Cyprus case law on the provisions implementing the CBMD. However, there were some Cyprus cases examining mergers resulting from schemes of arrangement on the basis of Section “Arrangements and Reconstructions” of Cyprus Companies Law (Chapter 113) (Arts. 198–201). These cases examined the consequences of mergers on certain relations between the merging companies and third parties. Although this case law concerns mergers taking place through schemes of arrangement, it is also very important for cross-border and domestic mergers, which are carried out by the Cyprus provisions implementing the CBMD and the DMD. As mentioned above, certain provisions on schemes of arrangement (Arts. 198–201) also apply by analogy to cross-border and domestic mergers, due to reference by Art. 201K (2)–(3). Hence, the interpretation of the relevant provisions on schemes of arrangement (Arts. 198–201) is very useful for cross-border mergers, because the same provisions are also applicable by analogy to cross-border mergers. More specifically, Cyprus Courts clarified certain subtle points concerning the post-merger status of guarantees, which were granted prior to the merger. In a series of cases, Cyprus Courts discussed whether a guarantor continues to guarantee the debt of a principal debtor, when the principal debtor was a company, which participated in a merger and was absorbed by an acquiring company. The facts of this series of cases concerned custom duties owned to custom authorities by specific import companies, which participated in mergers and were absorbed. The crucial question was whether the guarantee of these debts continues to produce legal effects after the merger and the subsequent change of the status of the principal debtor, which merged to another company. The Court examined whether the guarantor has to be liable to pay the debt of principal debtor, when this debtor was merged. An important aspect, which was examined by the Court, was whether a guarantee established under specific terms of an agreement could continue to operate under the same terms of this agreement after the merger and subsequent change of status of the principal debtor, which merged. In the Case Diefthintria Tmimatos Telonion (Director or Customs and Excise Department) v Titan Office Furniture Ltd and others, the Cyprus Court applied the general principle of English law, which declares null and void any preexisting guarantee of debts, when the status of the principal debtor changes. The Cyprus Court cited the relevant part of Halsbury’s Laws of England: “278. Change of the status of the principal debtors. Where a surety would be discharged from liability by the subsequent incorporations of persons to whom a guarantee is given, or in the case of a company being the guaranteed creditor, by its consolidation or amalgamation, it seems that he will also be discharged by similar changes taking place after the date of the guarantee in the constitution of the principal debtors was given”.54 In Case 54

Halsbury’s Laws of England (1993), paragraph 278. District Court of Larnaka, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Titan Office

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Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v Pop Life Electric Shops Limited and others, the Cyprus Court cited another extract from Halsbury’s Laws of England, which provided further explanations: “277. Save where an amalgamation or consolidation of two companies is effected by statute expressly or impliedly preserving rights against a surety, a guarantee given to either is generally invalidated as to future transactions by the amalgamation or consolidation.”55 In the Case Diefthintria Tmimatos Telonion (Director or Customs and Excise Department) v Titan Office Furniture Ltd and others, the Cyprus Court held that when a guarantor agrees to guarantee liabilities of a principal debtor, he evaluates the risk and the liability to which he is exposed and which he assumes on the basis, among others, of legal, economic, entrepreneurial and other characteristics of the specific principal debtor. In case of the principal debtor being a legal person, its merger with another legal person or with other legal persons (or any other change in its legal characteristics) overrides the elements on the basis of which the guarantor agreed to grant his guarantee. For this reason, the guarantee is declared null and void in such cases, except when the guarantor accepts the continuation of the guarantee. Only if the guarantor accepts the continuation of the guarantee after the completion of the merger, it remains valid.56 The Cyprus Court supported its conclusion by citing the relevant extract from the English case First National Finance Corporation Ltd v Goodman: Though there may be some ambiguity in what is meant by the person to which a guarantor makes his promise or gives his guarantee, I take it that both by statute and at common law a change in the identity of either a creditor firm or a debtor firm revokes the guarantee unless there is agreement to the contrary either express or implied. Further I see no reason to doubt what some textbooks state that the same principle should apply to individuals and bodies corporate. The guarantor’s knowledge of both creditor and debtor may be material to his guaranteeing the debts of the one to the other, whether those persons are firms, companies or individuals. Banking houses may be partnerships or corporations, and the effect of any change in the

Furniture Ltd, 2. Inter-Planet Logistics Ltd, 3. Frakapor Logistics Ltd, 4. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou Ltd, No. 3628/2011, 10 September 2015. 55 Halsbury’s Laws of England (1993). Although, in this case, the Cyprus Court reached an opposite conclusion on the continuity of the guarantee after the merger, the crucial extract is cited here. District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Pop Life Electric Shops Limited, 2. Genikes Asfalies Kiprou Ltd, 3. S.T.E. K.E.K LTD, No. 4941/2008, 19 December 2014. 56 District Court of Larnaka, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Titan Office Furniture Ltd, 2. Inter-Planet Logistics Ltd, 3. Frakapor Logistics Ltd, 4. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou Ltd, No. 3628/2011, 10 September 2015.

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identity of the partners or of the corporation on facilities and guarantees granted before the change will depend on the terms of the guarantee and the nature of the change57

Moreover, the Cyprus Court also focused on Art. 200 and clarified that this article did not prescribe the continuation of the validity of preexisting guarantees in case of mergers or reconstructions of legal persons. Additionally, the order of the Court sanctioning the scheme of arrangement did not mention the issue of guarantees.58 In the Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v Metacrome Limited and others, the Cyprus Court clarified further the relationship between the guarantor and the creditor by citing an extract from Halsbury’s Laws of England: “103. The principal debtor. The person primarily liable to the creditor for the obligation guaranteed is usually referred to as the principal debtor. Although sometimes bound by the same instrument as his guarantor, the principal debtor is not a party to the guarantor’s contract to be answerable to the creditor. There is not necessarily any privity between the guarantor and the principal debtor; they do not constitute one person in law, and are not as such jointly liable to the creditor, with whom alone the guarantor contracts.”59 Art. 200 (2) specifying the transfer of property or liabilities from the merging companies to the resulting company was also interpreted by the Cyprus Court in this case. According to this ruling, the guarantee did not constitute property or liability or contractual right of the principal debtor, which was transferred automatically and without further actions to the resulting company on the basis of the Court order sanctioning the merger.60 In the same case, the Cyprus Court examined the extent to which the change of the status of the principal debtor relieving the guarantor from the liability towards future transactions between the principal debtor and the creditor depends on the

57 First National Finance Corporation Ltd v Goodman [1983] BCLC 203. District Court of Larnaka, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Titan Office Furniture Ltd, 2. Inter-Planet Logistics Ltd, 3. Frakapor Logistics Ltd, 4. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou Ltd, No. 3628/2011, 10 September 2015. For this citation, see also: District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Pop Life Electric Shops Limited, 2. Genikes Asfalies Kiprou Ltd, 3. S.T.E.K.E.K LTD, No. 4941/2008, 19 December 2014. 58 District Court of Larnaka, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Titan Office Furniture Ltd, 2. Inter-Planet Logistics Ltd, 3. Frakapor Logistics Ltd, 4. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou Ltd, No. 3628/2011, 10 September 2015. 59 Halsbury’s Laws of England (1993), paragraph 103. District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Metacrome Limited, 2. Frakapor Logistics Limited, 3. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou (STETEK) Limited, No. 2215/2008, 24 March 2015. 60 District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Metacrome Limited, 2. Frakapor Logistics Limited, 3. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou (STETEK) Limited, No. 2215/2008, 24 March 2015.

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interpretation of the guarantee. The Cyprus Court cited an extract from Halsbury’s Laws of England in order to support this view: “293. Change of status of principal debtor. The question whether a change in the status or constitution of the principal debtor discharges a guarantee as to future transactions between the creditor and the principal debtor is primarily a question of construction of the guarantee. A guarantee which by its terms applies only to the debts of a named individual will not usually be construed to secure debts incurred after that individual enters into a partnership. However, partnership debts may be secured by such a guarantee, if it is clear from the surrounding circumstances that that is what the parties intended. Where the principal debtor is a partnership, in the absence of agreement to the contrary a continuing guarantee is revoked as to future transactions by any change in the constitution of the partnership. A guarantee for the debts of a named individual or partnership will not usually be construed to secure debts incurred by a company to which that business is transferred, even if that company is owned and controlled by the original principal debtors: for the company is a separate legal entity from its members, and its debts are not theirs. Nor will a guarantee for the debts of one company normally be construed so as to extend to cover the debts of its parent, subsidiary or sister companies to which its business is transferred on a reconstruction or amalgamation. However, such liabilities may be covered if it is clear that that is what the parties intended” [Emphasis added].61 Once again, there was a reference to First National Finance Corporation Ltd v Goodman, which held that the guarantees should declare whether they remain valid independently of any change of the status of the principal debtor.62 Nevertheless, there was a case, which had a different outcome from the previous cases. More specifically, the Cyprus Court accepted the transfer of guarantees of merging companies to the resulting company after the merger. In the Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) 61 Halsbury’s Laws of England (1993), paragraph 293 District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Metacrome Limited, 2. Frakapor Logistics Limited, 3. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou (STETEK) Limited, No. 2215/2008, 24 March 2015. Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. A.C.M. Christofides Ltd, 2. S.T.E.K.E.K. LTD confirmed this approach and cited this extract from Halsbury’s Laws of England. District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. A.C.M. Christofides Ltd, 2. S.T.E.K.E.K. LTD, No. 1893/ 2008, 20 December 2013. Another case followed exactly the same approach. Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v Arestis Bros Limited and others confirms this approach and cites the relevant extract from Halsbury’s Laws of England. Halsbury’s Laws of England (1993), paragraph: 293. District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Arestis Bros Limited, 2. Inter-planet Logistics Limited, 3. Frakapor Logistics Limited, 4. S.TA.TE.PE.L. Limited. No. 1525/08, 11 September 2015. 62 District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Metacrome Limited, 2. Frakapor Logistics Limited, 3. Sinergatiko Tamieftirio Epaggelmatikon Kladon ke Epihirimation Kiprou (STETEK) Limited, No. 2215/2008, 24 March 2015.

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v 1. Pop Life Electric Shops Limited, 2. Genikes Asfalies Kiprou Ltd, 3. S.T.E.K.E.K LTD, the Cyprus Court reached a different position and found that the guarantee continued to bind the guarantor after the merger for the debts of the merging companies, which were transferred to the resulting company. Adopting a different view from the previous cases, it held that the preservation of the validity of the guarantee after the merger did not require any further actions, but to the contrary an explicit declaration was required when the guarantees would not be transferred. The Cyprus Court stressed a specific phrase from the extract of Halsbury’s Laws of England cited above: “save where an amalgamation or consolidation of two companies is effected by statute expressly or impliedly preserving rights against a surety”. Taking into account this phrase, the Court interpreted Art. 200(2) and (4) and found that a guarantee was a property right falling within the scope of property of Art. 200(4), which was transferred from the merging subsidiaries to the resulting company due to the merger. Art. 88 of Cyprus Contract Law (Chapter 149) was invoked in order to enhance this position: “A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.” The various documents of guarantees were examined as evidence by the Cyprus Court and assisted it in reaching this decision.63 In all these cases discussed above, the guarantor participated in the meetings aiming at approving the scheme of arrangement as a creditor and not in its capacity as a guarantor. The guarantor also had the capacity of a creditor under a different contract and took part in this meeting under this capacity. Hence, the argument that the guarantee was considered in the meeting due to the participation of the guarantor in it cannot be accepted; it was a creditors’ meeting and the party participated in its capacity as a creditor and not as a guarantor. It is interesting to mention here the approach of English case law to the position of guarantees in schemes of arrangement. Apart from sanctioning arrangements varying the rights of shareholders or creditors against the company, English Courts can also sanction schemes of arrangements under which shareholders or creditors quit rights against third parties, e.g. guarantees.64 According to English case law, a term of schemes of arrangement is that they are established between the company and its shareholders or its creditors; schemes of arrangement can also include third parties, only if the arrangement with the third party is integrated into the functioning of the scheme of arrangement and constitutes part of a single proposition encompassing all parties.65 Some other cases examined certain aspects of mergers in the financial sector. These cases did not scrutinize the provisions of cross-border mergers. However, they

63 District Court of Nicosia, Cyprus, Case Diefthintria Tmimatos Telonion (Director of Customs and Excise Department) v 1. Pop Life Electric Shops Limited, 2. Genikes Asfalies Kiprou Ltd, 3. S.T.E. K.E.K LTD, No. 4941/2008, 19 December 2014. 64 Re Lehman Brothers International (Europe) [2009] EWCA Civ 1161; [2010] BCC 272, [65], Gullifer and Payne (2011), p. 620. 65 T & N (No. 3) [2006] EWHC 1447 (Ch); [2007]1 All ER 851. Gullifer and Payne (2011), p. 620.

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are also useful for cross-border mergers. In Royal Bank of Scotland p.l.c. v. Geodrill co. ltd. and others, the Supreme Court of Cyprus examined a merger between two banking institutions in Scotland and its succession as a creditor to a loan granted by the merging company. This case examined private international law and evidence law aspects of the “appointed day”, the date after which the situation of the merger would take effect.66 In two other cases, the Cyprus Courts scrutinized the findings of Royal Bank of Scotland p.l.c. v. Geodrill co. ltd. and others and proceeded to a differentiation between, on the one hand, the legal effects of a merger between two banks and, on the other hand, the legal effects of the transfer of banking business between two banks or financial institutions, with regard to the status of loans and other liabilities.67 Although all these Cyprus cases concern domestic mergers, which took place under a scheme of arrangement, their findings remain crucial for cross-border mergers. It should also be noted that, in these cases, the relevant mergers, took place before the implementation of the CBMD in Cyprus. However, this issue does not affect the importance of these cases for cross-border mergers. The Section “Arrangements and Reconstructions” of Cyprus Companies Law (Chapter 113) (Arts. 198–201) continued to be valid after the implementation of the CBMD and the DMD in Cyprus law and constituted the foundation for certain aspects of the regulation of cross-border and domestic mergers, such as protection of stakeholders and decision-making process.

6 Gold-Plating of the Transposition of the CBMD into Cyprus Law Regarding gold-plating68 of the transposition of the CBMD into Cyprus law, Art. 4 of the CBMD states: “Conditions relating to cross-border mergers 1. Save as otherwise provided in this Directive, (a) cross-border mergers shall only be possible 66

Supreme Court of Cyprus, Case Royal Bank of Scotland p.l.c. v. Geodrill co. ltd. and others, Civil Appeal 8317, 8 October 1993. 67 Supreme Court of Cyprus, Case M. A. Goodvalue Suppliers LTD and others v. Barclays Bank plc, Civil Appeal 10430, 13 July 2001. District Court of Pafos, Case National Bank of Greece (Cyprus) Ltd/Ethniki Trapeza tis Ellados (Kiprou) Ltd v Andrea Panagiotou, No. 1489/07, 8 September 2011. See, also: Law 64(I)/1997 Transfer of Banking Business and Collateral, Paragraph I(I), No. 3168, 18-7-1997, Official Gazette of the Republic of Cyprus. 68 It is necessary to provide a definition of gold-plating provided by the European Commission: “At EU level, ‘gold-plating’ refers to transposition of EU legislation in a manner which goes beyond what is required by that legislation, while staying within legality. Member States have considerable discretion when implementing directives. They may often increase the frequency of reporting obligations, add procedural requirements for authorising the sale of a product, or apply more rigorous penalties. While not illegal, ‘gold plating’ may be a bad practice because it imposes costs that could have been avoided. Gold-plating therefore is different from a transposition measure in contradiction with a Directive and subject to infringement procedure” Commission staff working

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between types of companies which may merge under the national law of the relevant Member States, and [. . .]”. Cyprus legislature gold-plated this provision and decided that companies limited by guarantee and companies in administration cannot take part in cross-border mergers (201K(1)).69 Art. 13 of the CBMD states: “Registration. The law of each of the Member States to whose jurisdiction the merging companies were subject shall determine, with respect to the territory of that State, the arrangements, in accordance with Art. 3 of Directive 2009/101/EC [. . .] for publicizing the completion of the cross-border merger in the public register in which each of the companies is required to file documents.” Cyprus gold-plated this provision and demanded a copy of the decision approving the completion of the cross-border merger attached to every copy of the memorandum of the new company formed on completion of the cross-border merger. (Art. 201T(1)).70 Art. 6 of the CBMD refers to publication: “Publication of the common draft terms of the cross-border merger (Art. 4(1) Directive 2009/109/EC)”. According to the findings of the Study, Cyprus gold-plated this provision: “each of the merging Cypriot companies is exempted from the obligation to publish the CDTM (Common Draft Terms of Cross-Border Mergers) in the Government Gazette if for a continuous period beginning at least one month before the day fixed for the general meeting which is to decide the CDTM and ending not earlier than the conclusion of that meeting, it makes the common draft terms of such merger available on its website free of charge for the public. The provision continues further to impose an obligation on the company to maintain the information on its website for at least one month after the conducting of the general meeting and also that the specific period should be prolonged for such a time period that a possible interruption of access to the website has occurred because of technical or other reasons. The Cyprus legislation does not impose an obligation for the publication to be effected via a central electronic platform or otherwise and if the publication is made on the website of the merging company it will be adequate for the Cyprus legal provisions (201M)”.71 Art. 15(2) of the CBMD refers to simplified formalities (Art. 4(2) Directive 2009/ 109/EC): “Where a cross-border merger by acquisition is carried out by a company which holds 90% or more, but not all, of the shares and other securities conferring the right to vote at general meetings of the company or companies being acquired, reports by an independent expert or experts and the documents necessary for scrutiny shall be required only to the extent that the national law governing either the acquiring company or the company or companies being acquired so requires, in accordance with Directive 78/855/EEC”. Cyprus gold-plated this provision and

paper—Annex to the report from the Commission “BETTER LAWMAKING 2006” pursuant to Article 9 of the Protocol on the application of the principles of subsidiarity and proportionality (14th report), COM(2007) 286 final, SEC/2007/0737 final. 69 Bech-Bruun and Lexidale Study (2013), p. 142. 70 Bech-Bruun and Lexidale Study (2013), p. 160. 71 Bech-Bruun and Lexidale Study (2013), pp. 171–172.

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made the merging company, which owned all shares and not only 90%< as per the CBMD, subject to exceptions of domestic law (201V(2)).72 The Study indicated certain aspects of the CBMD, which were not gold-plated by the Cyprus legislature. These are areas, where additional gold-plating could take place in Cyprus. In a future amendment of its national rules implementing the CBMD, Cyprus could expand the scope of the CBMD in the following areas: companies in liquidation, company law forms, geographical scope, cash payments, inclusion of investment companies, triangular mergers, the common draft terms of cross-border mergers of Art. 5 of the CBMD.73

7 Concluding Remarks This chapter examined the experience so far from the implementation of the CBMD in Cyprus. Anyone involved in cross-border mergers in Cyprus should pay special attention to the multi-level regulatory model applying to the implementation of the CBMD in Cyprus, which is an inherent element of the CBMD. Decision-making process, creditor protection and protection of minority shareholders are especially affected by this multi-level regulatory model. A careful study of the Section on “Arrangements and Reconstructions” in Cyprus Companies Law (Chapter 113) is essential for understanding this multi-level regulatory model, which underpins the protection of the stakeholders mentioned above. The provisions on cross-border mergers of the Cyprus Companies Law (Chapter 113) refer to the provisions on domestic mergers and on schemes of arrangement of Cyprus Companies Law (Chapter 113). Hence, the intricacies of schemes of arrangement also affect crossborder mergers. Cyprus legislature did its best to adjust the new provisions on crossborder mergers to the already existing legal framework of schemes arrangement. Although this adjustment might result in certain difficulties, the long experience from the use of schemes of arrangement would be precious for carrying out crossborder mergers under the new provisions implementing the CBMD. Although Cyprus Courts have not yet examined the provisions implementing the CBMD in Cyprus law, Cyprus case law on schemes of arrangement assists in the interpretation of the provisions on cross-border mergers and sheds light on specific obscure relations arising from mergers. Cyprus legislature also gold-plated specific articles of the CBMD in order to achieve a more detailed and comprehensive regulation of cross-border mergers in Cyprus law. The implementation of the CBMD in Cyprus law would definitely enhance the attractiveness of Cyprus as an already popular destination to establish a company. After the implementation of the CBMD, Cyprus companies have at their disposal an additional cross-border corporate restructuring

72 73

Bech-Bruun and Lexidale Study (2013), p. 172. Bech-Bruun and Lexidale Study (2013), p. 111.

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mechanism, which strengthens cooperation and consolidation of companies in the internal market. Acknowledgement This research is financed by the Republic of Cyprus through the Research Promotion Foundation (Research Project: “Takeovers and Mergers in European, Cypriot and Greek Company Law” KOULTOURA//BP-ΝΕ/0514/18).

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Tepass M (2012) Employee participation schemes and EU employment rules for cross-border reorganizations. In: Vermeylen J, Vande Velde I (eds) European cross-border mergers and reorganisations. OUP, Oxford, pp 123–142 Tsadiras A (2010) Cyprus. In: Van Gerven D (ed) Cross-border mergers in Europe, vol I. CUP, Cambridge, pp 133–146 van Eck GC, Roelofs ER (2011) Ranking the rules applicable to cross-border mergers. ECL 8 (1):17–22 Worthington S (2016) Sealy and Worthington’s text, cases and materials in company law, 11th edn. OUP, Oxford, pp 21–22

Thomas Papadopoulos is an Assistant Professor of Business Law at the Department of Law of the University of Cyprus. He received a degree of DPhil in Law (2010), a degree of MPhil in Law (2007) and a degree of Magister Juris-MJur (2006) from the Faculty of Law, University of Oxford, UK. He also received his LLB with Distinction (ranked 1st) from the Department of Law, Aristotle University of Thessaloniki, Greece (2005). Previously, he was a visiting researcher at Harvard Law School (2009–2010). He is also a Visiting Professor at International Hellenic University and an Attorney at law (Greece). Moreover, he is an Editorial Secretary of European Company Law (ECL) Journal. He was awarded the “Cyprus Research Award-Young Researcher (2014)” of the Research Promotion Foundation of the Republic of Cyprus (category of ‘Social Sciences & Humanities’). This distinction was awarded on the basis of his research on Takeovers and Mergers and was accompanied by a research grant. He is the Project Coordinator of the Research Project “Takeovers and Mergers in European, Cypriot and Greek Company Law”, which is financed by the Research Promotion Foundation of the Republic of Cyprus. His articles were published in many top international law journals.

Cross-Border Mergers: The Danish Experience Hanne S. Birkmose

1 Introduction Danish company law has traditionally been open to international relations and crossborder activities. However, cross-border mergers were not possible prior to developments on the EU level, initiated by the European Court of Justice (ECJ) with the SEVIC case (C-411/03) and the adoption in 2005 of the 10th Company Law Directive on Cross-border Mergers (2005/56/EC) (the CBM Directive). The adoption of the CBM Directive was hailed as a breakthrough for EU company law and a huge step toward the realization of an EU-wide internal market for company mobility. However, in Denmark as in other EU Member States, the effect of the CBM Directive on cross-border mobility seems to be somewhat limited.1 As the Danish provisions on cross-border merger have been designed with a view to creating legal familiarity with the principles vis-à-vis domestic mergers and ensuring wide access to cross-border corporate mobility, while at the same time protect the interests of shareholders and creditors, the limited success provides a puzzle that is not easily answered. The purpose of this contribution is to analyse in general the implementation of the CBM Directive in Danish law. The chapter opens with a presentation of the state of Danish law prior to implementation, followed by some remarks on the regulatory design of the Directive’s implementing provisions and the scope of the Danish rules. The chapter continues with an analysis of the Danish rules that provide protection for

1

Bech-Bruun & Lexidale (2013), pp. 9 ff.

H. S. Birkmose (*) Aarhus University, Aarhus BSS, Department of Law, Aarhus, Denmark e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_14

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creditors and minority shareholders in the non-surviving limited company.2 The Danish provisions on cross-border mergers make up the basis for the Danish provision on transfer of the seat. This form of restructuring continues to be part of the European discussion on corporate mobility in the internal marked, which is why the chapter closes with a short presentation of the Danish rules on cross-border relocation of the registered office and their links with the CBM Directive.

2 State of the Law Prior to the 10th Company Law Directive Danish company law has traditionally been open to international relations and crossborder activities, and it has been the general opinion in Danish international private law that Denmark followed incorporation theory (or a variant known as registration theory).3 Despite this openness, cross-border mergers were not possible prior to developments on the EU level that were initiated by the ECJ with the SEVIC case (C-411/03) and the adoption in 2005 of the 10th Company Law Directive on Crossborder Mergers (2005/56/EC). Prior to this, the state of Danish law had been similar to that of most other EU Member States: cross-border mergers were generally not recognized.4 Generally, it was assumed that mergers involving Danish companies required a specific legal basis in Danish law.5 After the 3rd Company Law Directive on mergers (78/855/EEC)6 was implemented within the Danish Public Companies Act and the Danish Private Companies Act in 1982,7 the general position was that mergers were open only to Danish companies regulated by one of the two company acts.8 That is, mergers outside the scope of the company acts were not possible, and neither of the two company laws included provisions on cross-border mergers.9 Other types of company that wished to gain some of the benefits of a merger had to resort to other forms of restructuring, such as the formation of groups of companies. This perception was confirmed by one decision by the Danish Tax Assessment The Danish rules on the protection of the employee’s right to co-determination in CA §§ 311–317 are not discussed in this chapter. 3 Birkmose (2019). 4 See for an overview: Siems (2005), pp. 169 f. See also: Bech-Bruun & Lexidale (2013), p. 7. 5 Rønfeldt and Werlauff (2006), p. 125. 6 The Directive has been replaced by Directive 2011/35/EU. 7 The 3rd Company Law Directive only apply to Danish public limited companies, cf. Art. 1, but the directive was implemented in the Danish Public Companies Act as well as in the Danish Private Companies Act. Act No. 282 of 9 June 1982 and Act No. 283 of 9 June 1982. 8 Sørensen (2006b), p. 76; Hansen (2006), p. 50. Both with further references. 9 There were few exceptions for other forms of limited companies. Thus, domestic mergers between industrial foundations as well as domestic mergers between limited co-operatives were regulated by law. See Consolidation Act No. 651 of 15 June 2006 and Executive Order No. 249 of 23 March 2006. 2

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Board (Ligningsrådet) in 1998, and another by the Danish Company Appeals Board (Erhvervsankenævnet) in 2001.10 In both cases, the rulings noted that the current state of Danish company law did not include a legal basis for cross-border mergers. The entry into force of the Statute for a European Company (SE) on 8 October 200411 partly changed the Danish state of the law: cross-border mergers became a reality for companies taking part in the establishment of an SE company. However, cross-border mergers through the establishment of an SE were only available to limited companies that fulfilled the requirements of the Regulation.12 Consequently, private limited companies and public limited companies that did not want to conduct their business as an SE had still no access to cross-border mergers.

3 SEVIC and the Implementation of the 10th Company Law Directive in Danish Law The proposal for a Directive on cross-border mergers of companies with share capital presented by the European Commission in November 2003 was therefore an anticipated legal measure.13 It is well known that the directive had been in the pipeline since the eighties,14 but the question of worker representation on boards had been a key problem that delayed its adoption. Shortly after the adoption of the directive in October 2005, but before its entry into force,15 the ECJ decision in the so-called SEVIC case, (C-411/03),16 established that cross-border mergers should be seen as a form of establishment that is protected under Articles 43 and 48 of the EC Treaty.17 The consequence of the ruling was that Member States shall accept mergers of companies established in different Member States to the same extent they accepted the mergers of domestic companies.18 The general opinion in the literature was that SEVIC broadened the understanding of the right of establishment in EU company law, as it recognized that cross-border mergers are one of several methods of cross-border establishment. Thus, it was

10

TfS 1998, 797LR and Erhvervsankenævnets ruling of 4 April 2001. Council Regulation No 2157/2001 of 8 October 2001 on the Statute for a European company (SE). In Denmark implemented by Lov om det europæiske selskab (SE-loven). Act No. 363 of 19 May 2004. 12 Regulation 2157/2001, Art. 2(1). 13 Proposal for a Directive of the European parliament and of the Council on cross-border mergers of companies with share capital. COM (2003) 703 final. 14 See for a historical account of the directive: Siems (2005), pp. 171 f. 15 The Directive had to be implemented by December 2007, cf. Art. 19 of the Directive. 16 ECJ, Case C-411/03 SEVIC Systems AG (2005) ECT I-10805. 17 Article 49 and 54 TFEU. 18 Rønfeldt and Werlauff (2006), p. 125. 11

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widely held that the SEVIC ruling was important not only to cross-border mergers, but also with respect to cross-border divisions and cross-border takeovers.19 In Denmark as well as other countries, the scope of the SEVIC case was discussed.20 Of particular interest was the question of whether the ruling only concerned the right to register a cross-border merger in the Member State where the continuing company had its seat (registration of inbound mergers), or if it also concerned a company’s right to dissolve itself in the Member State of origin in order to take part in a cross-border merger (outbound mergers).21 This discussion was superseded by the adoption of the CBM Directive, but the discussion may still be relevant to other forms of cross-border establishment, such as cross-border divisions, which are still not harmonized. Shortly after the ruling in the SEVIC case, the Danish Business Authority (Erhvervs- og Selskabsstyrelsen22) issued a guiding statement,23 wherein it noted that the ECJ had recognized that cross-border mergers could face specific problems not found in relation to domestic mergers. Further, the Business Authority noted that nothing in Danish law at the time allowed for the particular situation relating to cross-border mergers and the specific problems arising in relation to such mergers. Consequently, it was the Danish Business Authority’s opinion that the SEVIC ruling required Member States to ensure that national regulations were made consistent with the Treaty as soon as possible. This statement was criticized24 on the grounds that a prejudicial ruling enters into force ex tunc, as the ECJ interprets existing rules,25 unless the ECJ limits the duration in time.26 Moreover, because of the SEVIC case the Danish Business Authority decided to accelerate the implementation of the CBM Directive,27 and a proposal was put forward to the Danish Parliament on 7 February 2007. Danish rules on crossborder mergers were adopted by the Danish Parliament on 6 June 2007 and came into force 1 July 2007.28

19 Rønfeldt and Werlauff (2006), pp. 126 f.; Sørensen (2006a), p. 3. See also: Siems (2007), pp. 314 ff. 20 Siems (2007), pp. 308 f.; Schindler (2006), p. 117. 21 In favour of a wide interpretation, see Hansen (2006), p. 194; Sørensen (2006b), pp. 80 ff.; Hansen (2006), pp. 55 ff.; Schindler (2006), pp. 116 f. See for a more narrow interpretation: Sørensen (2006a), p. 3. 22 Now ‘Erhvervsstyrelsen’. 23 Statement of 14 march 2006 (case 2006-0005219). 24 Sørensen (2006b), pp. 78 ff. 25 Weatherill and Beaumont (1999), p. 351 f. 26 This was for the first time established in the Defrenne-case (43/75, ECR 455, 1976). 27 Bunch et al. (2006), p. 44. 28 Act No. 573 of 6 June 2007.

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279

Background

It follows from the preparatory work for the implementation of the CBM Directive that the Danish provisions on cross-border mergers have been prepared on the basis of the Directive as well as the SEVIC case.29 The latter is interesting because, due to the wider implications of the SEVIC case, Danish law also includes provisions on cross-border divisions.30 It was fundamental to the Danish national position that the same legal principles and provisions should apply for business mergers and divisions, regardless of whether they are purely domestic or involve European partners. Hence, the provisions for domestic mergers and divisions in Danish Public Limited Company Act and the Private Limited Company Act that were based on the 3rd and the 6th company law directives, were largely applied to cross-border mergers and divisions as well.31 It was mentioned in the preparatory work that, to ensure Danish companies’ competitive position, the Danish implementation of the CBM directive should not be more restrictive than what was required by EU law.32 Moreover, the importance of Danish companies’ access to cross-border reorganization is emphasized, and increased flexibility relating to company mobility and the restructuring of company activities in the Internal Market are mentioned as an argument for including provisions on cross-border division in the Danish company acts.33

3.2

Regulatory Strategy

The initial Danish provisions on cross-border mergers build to a large extent on the provisions that regulated domestic mergers. This was particularly clear when the Directive first was implemented, because the new § 137(2) in the Public Limited Companies Act, simply referred to the existing provisions on domestic mergers in § 134–134j, with very few amendments.34 Moreover, the implementation in the Private Limited Companies Act resulted in provisions on cross-border mergers that referred to the provisions in the Public Limited Companies Act with the addition

29

Proposal for amendment of the Danish Public Limited Act and of the Danish Private Limited Act, LFF 2006–2007.1.153, Sec. 1.2. 30 These provisions will not be discussed any further, but generally speaking the provisions mirror the provisions on cross-border mergers. See the Companies Act §§ 291–310. 31 Proposal for amendment of the Danish Public Limited Act and of the Danish Private Limited Act, LFF 2006–2007.1.153, Sec. 1.2. This is also reflected in the CBM Directive, preamble 3. 32 Proposal for amendment of the Danish Public Limited Act and of the Danish Private Limited Act, LFF 2006–2007.1.153, Sec. 1.2. 33 See also: Siems (2007), pp. 314 f. 34 See LFF 2006–2007.1.153 § 1.

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that the provisions should apply to private limited companies ‘with the necessary modifications’.35 This regulatory strategy ensured that the same fundamental basis was applied for domestic and cross-border mergers, even though it was sometimes necessary to set up different requirements, due to the cross-border nature of the latter. The strategy also ensured that Danish companies taking part in a cross-border merger were familiar with the applied set of rules. Thus, it intended to ensure neutrality between domestic and cross-border mergers, in order to ensure that merger decisions would not be affected by competing sets of rules. Finally, from a technical legal perspective, the strategy kept down the number of provisions in the two Danish company acts.36 The chosen approach hardly fulfilled its aim of ensuring legal certainty. This was particularly regarding private limited companies. Even though the 3rd Company Law Directive on domestic mergers was implemented in relation to private limited companies as well as to public limited companies, the Private Limited Companies Act did not include provisions on domestic mergers, but only made a reference to the provisions in the Public Limited Companies Act.37 The implementation of the provisions in the Cross-border Mergers Directive added to the uncertainty, as the Private Limited Companies Act § 67b referred to the Public Limited Companies Act §§ 137–137g (which referred to the provisions on domestic mergers) with the necessary modifications. This regulatory approach was discussed by the Committee on the Modernisation of Company Laws (Moderniseringsudvalget) in 2008, prior to the adoption of the revised Companies Act in 2009.38 It found that companies had difficulty in understanding and applying the approach because they were uncertain as to what the state of the law was in relation to a specific merger.39 In line with the recommendations made by the Committee on the Modernisation of Company Laws, the two company acts were merged into one: the 2009 Companies Act.40 Chapter 16 of this Act details the provisions on cross-border mergers and divisions in for private as well as public limited companies.41 The 2009 provisions are largely the same for private and public companies, but contrary to the former company acts, the Companies Act include detailed provisions on cross-border mergers as well as divisions. Aside the change in See LFF 2006–2007.1.153 § 2. See also Danelius (2007), p. 49. 37 See § 65. 38 The Committee on the Modernisation of Company Laws was asked by the then Minister of Economic and Business Affairs to look at the current company regulation in order to revise both acts. White Paper No. 1498 published on 26 November 2008 by the Committee on the Modernisation of Company Laws, pp. 15 f. 39 White Paper No. 1498 published on 26 November 2008 by the Committee on the Modernisation of Company Laws, s. 31. See also Obling and Bunch (2011), pp. 26 ff. 40 Act 2009-06-12 No. 470. 41 The provisions are largely identical for both types of companies. Whenever, there are exemptions for private limited companies, these are clearly stated in the provisions. 35 36

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regulatory strategy, the actual provisions on cross-border mergers were amended in a few aspects. This was partly a result of amendments to the provisions on domestic mergers. In general, it was fundamental to the revised Companies Act that it should be flexible and, when possible, it should be left to the members of the company to decide how to organize the affairs of the company.42

3.3

Scope

The CBM Directive Article 1 states that the Directive shall apply to mergers of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community, provided that at least two of them are governed by the laws of different Member States.

Consequently, the Danish provisions apply to Danish Public Limited Companies (aktieselskaber), Danish Private Limited Companies (anpartsselskaber) and Danish Limited Partnership Companies (kommanditaktieselskab).43 However, since Danish law also included provisions on domestic mergers of other forms of limited companies, such as limited co-operatives and industrial foundations, provisions on crossborder mergers were also included in the Commercial Foundations Act and the Act on Certain Commercial Undertakings.44 Besides the specific aim of ensuring wide access to cross-border restructuring, the decision to widen the scope of the Directive was a direct consequence of the ruling in the SEVIC case.45 Danish law includes provisions for mergers between private and public limited companies, but where the company form is outside the scope of the 1st Company Law Directive, the Danish Business Authority must assess whether the form of the foreign company is comparable to that of the Danish company. In all situations, the Danish provisions on cross-border mergers only apply to the Danish company or companies taking part in the merger. There is some question as to whether the cross-border requirement in the CBM Directive Article 1 extends to a situation where two Danish companies engage in a merger as defined in the CBM Directive Article 2 (2)(b) and transfer all their assets and liabilities to a company that they form in another Member State. So far, the Danish Business Authority has not given an opinion on the matter, but it has been

42 In relation to mergers and divisions, see the White Paper No. 1498 published on 26 November 2008 by the Committee on the Modernisation of Company Laws, chapter 11. The flexibility is larger in relation to private limited companies. 43 See Art. 1 of the 1st Company Law Directive. Directive 2009/101/EC. 44 See Act No. 573 of 6 June 2007, §§ 3 and 4. 45 Proposal for amendment of the Danish Public Limited Act and of the Danish Private Limited Act, LFF 2006–2007.1.153, Sec. 2.1 and § 3 & 4.

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argued that such a merger would fulfil the cross-border requirement and should be allowed under existing Danish provisions.46 Even though the preparatory work makes clear that cross-border mobility is seen as very important to ensure the competitive position of Danish companies, the scope of the regulation on cross-border mergers in the Companies Act is limited to crossborder mergers with companies located in the European Union or in the EEA, cf. § 271.47 As mentioned above, Danish regulators found that because of SEVIC and the fact that the 6th Company Law Directive had been implemented in the Danish company acts in the 1993 amendments, the regulation on cross-border reorganizations should also include provisions on cross-border divisions. These provisions are based on the provisions for cross-border mergers and thus on the CBM Directive,48 but the scope is not identical. The 6th Company Law Directive on domestic divisions applies only if Member States allow companies to carry out divisions, and the regulation of divisions is consequently not harmonised in the Member States.49 Based on the SEVIC case, the Danish perception is that Danish private and public limited companies may participate in cross-border divisions in which the other participating companies are also limited liability companies governed by the laws of one or more other EU or EEA states that allow for domestic divisions of such companies.50

3.4

Pre-merger Documents

To a very large extent, the substantive regulation of cross-border mergers in the Public Limited Companies Act was carried on in the 2009 Companies Act, which serves as the basis of the following discussion.51 The common draft terms of a cross-border merger is considered a proposal for a merger, and consequently the Companies Act does not set any requirements for the form of the document. The document, including any attachments, has to be drawn up in Danish, and the Danish Business Authority bases its assessment on this version.52

46

Obling and Bunch (2011), pp. 26 ff. See also Bunch and Rosenberg (2014), p. 1102. Both authors were employed by the Danish Business Authority when their commentary was published. 47 Proposal for amendment of the Danish Public Limited Act and of the Danish Private Limited Act, LFF 2006–2007.1.153, comment on § 137 b. 48 Generally speaking, the provisions mirror the provisions on cross-border mergers. See the Companies Act §§ 291–310. 49 See Art. 1 of the 6th Company Law Directive. Directive 82/891/EEC. 50 Obling and Bunch (2011), pp. 26 ff. 51 Consolidated Act No. 1089 of 14 September 2015. However, in relation to some issues the 2009 Act resulted in a relaxation of the regulation on cross-border mergers. These are not the main focus of the discussion here. 52 See Thorup and Buskov (2010), p. 172; Obling and Bunch (2011), pp. 26 ff.; Bunch and Rosenberg (2014), pp. 1108 f.

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Many Member States have similar requirements, and the common draft terms—a single document drawn up by the management or administrative organ of each of the merging companies—has to fulfil all language requirements. CA § 272(1) states that the central governing bodies for the existing limited companies that participate in the merger must draw up and sign a joint merger plan. According to the practice of the Danish Business Authority, this means that all members of the board of directors or of the executive board must sign the common draft terms.53 It has been argued that this requirement, which is not found in the wording of the Companies Act, is against the rules on the power to bind the company in CA § 13554 as the wording of § 272(1) does not indicate any changes in the power to bind the company. CBM Directive Article 5 (a)–(l) establishes the content of the common draft terms. Aside from the requirement that the terms should include information on the likely repercussions of the cross-border merger on employment, cf. § 272(1)(5), the terms are almost identical with those for domestic mergers, cf. CA § 272(1) compared with § 237(3).55 The Danish Business Authority must receive the signed common draft terms no later than 4 weeks after they have been signed by all parties, CA § 279(1). This deadline was chosen to ensure uniformity with the existing provisions on domestic mergers.56 The Danish Business Authority does not publish the actual common draft terms, only a statement confirming that the Danish Business Authority has received information on a planned merger between two or more specified companies, cf. § 279(4).57 The requirements for the report of the board of directors are largely identical to those in a domestic merger, cf. CA § 273 compared with § 238.58 § 273, based on the CBM Directive Article 7, requires that the central governing bodies of each of the existing limited liability companies participating in the merger must draw up a report in which they explain the implications of the cross-border merger for shareholders, creditors and employees. A second requirement in Article 7, that the central governing bodies shall explain and justify the legal and economic aspects of the cross-border merger in the report, cannot be seen in the wording of § 273. The preparatory work for this paragraph does not mention it either, even though the

A Danish limited company can choose between different governance structures, cf. CA § 111. However, in order to keep it simple the term board of directors will be used in the following to describe the superior governance body in the Danish system. 54 Madsen (2010), pp. 83 f. In particular § 135 (2): ‘The limited liability company is bound by agreements made on behalf of the company by the entire central governing body, by a member of the board of directors, or by a member of the executive board. Members of the supervisory board have no power to bind the limited liability company.’ 55 Compare the Directive Art. 5(d). 56 Proposal for amendment of the Danish Public Limited Act and of the Danish Private Limited Act, LFF 2006–2007.1.153, Sec. 2.1 and 2.2. 57 Thorup and Buskov (2010), p. 172. 58 § 273 implements the CBM Directive Art. 7. 53

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comments on § 273 specifically include a reference to the CBM Directive Article 7.59 Arguably, the first part of Article 7, ‘explaining and justifying the legal and economic aspects of the cross-border merger’, is included in the second part, ‘explaining the implications of the cross-border merger for members, creditors and employees’, as the implications of the cross-border merger for members largely will be of a legal and economic nature. However, the wording suggests that the two requirements are cumulative. Moreover, the importance of these two specific aspects in particular in cross-border mergers suggests that it would be appropriate to include them both in the legislation that implements Article 7. Finally, an independent expert report must be drawn up for each merging Danish company, cf. § 276,60 unless the shareholders of each of the merging companies agree that it is unnecessary, cf. 276(1).61 As discussed below, this is important not only in relation to the Danish provisions on the protection of shareholders of the merging companies, but also to the protection of creditors. The report must include a declaration by the independent experts as to whether the consideration offered for the shares in the non-surviving limited liability company is fair and reasonable.62 The declaration must be clear and unambiguous, and, according to the practice of the Danish Business Authority, it must include the wording ‘fair and reasonable’.63

3.5

Conditions Relating to Cross-Border Mergers

The need for special measures to protect the interests of creditors and shareholders, among others, in a cross-border situation is recognized both in the CBM Directive Article 4(2) and in the SEVIC ruling, paragraph 27. Consequently, even though the Danish position has been that the regulation of cross-border mergers should be based on the provisions on domestic borders, special measures have been adopted to accommodate the cross-border nature of the merger and thus the specific problems relating to shareholders and creditors arising from this form of cross-border restructuring.

59 See LFF 2008.1.107. Neither does the initial implementation in the Public Limited Companies Act § 137 b mention it, cf. LFF 2006–2007.1.153 § 1, comment on § 137 b. 60 § 276 implements the CBM Directive Art. 8. 61 See LFF 2006–2007.1.153 § 1, comment on § 137c. 62 The merger plan, not the merger statement, forms the basis of the report of the independent experts. See Bunch and Rosenberg (2014), p. 1135. Consequently, the independent experts must make assess the consideration independently of the governing body’s assessment. 63 Bunch and Rosenberg (2014), p. 1135.

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Protection of Creditor Interests

The CBM Directive does not harmonise the protection of creditor interests. Rather, Article 4 refers to national provisions that regulate the creditor position in domestic mergers, with the addition that the cross-border nature of the merger needs to be taken into account. The protection of creditor interests in relation to domestic mergers in the Danish Companies Act relies on the independent experts. It follows from CA § 242 that in domestic mergers, in addition to the statement on the merger plan described above, the independent experts must make a declaration as to whether the creditors of each limited company can be considered to be sufficiently protected after the merger.. This approach is also applied to cross-border mergers, cf. § 277. However, in cross-border mergers the shareholders of the Danish company may decide, by unanimous agreement, not to obtain such a declaration on the creditors’ position, cf. § 277(2). If the independent experts find that the creditors of the merging limited company cannot be considered to be sufficiently protected after the merger,64 or if the shareholders have decided not to obtain a declaration by a valuation expert on the creditors’ position, then creditors whose claims arose prior to the Danish Business Authority’s publication of the notification of the intended merger may file their claims with the company.65 Such claims must be filed no later than 4 weeks after the Danish Business Authority has published the notification of the intended merger.66 The right to file a claim applies to claims that are due as well as claims that are not yet due.67 However, claims for which adequate security has been provided may not be filed, cf. § 278(1). If the limited company and any creditors who have filed their claims disagree as to whether security should be provided or whether the security offered is adequate, either party may bring the matter before the bankruptcy court no later than 2 weeks after the claim is filed, cf. § 278(4). In case of such disagreement between the parties, the Danish Business Authority may not issue the certificate required to complete the merger till the disagreement has been settled, cf. CA § 289 (1)(2). This may delay the merger or in worst-case result in the merger falling flat. In order to balance the interests of the merging companies and the creditors, and to secure a flexible merger process, the Danish Business Authority accepts that the company provide a bank guarantee as security. This guarantee allows the involved

64 Notice that the intended cross-border merger can proceed as planned even if the independent experts find that the creditors cannot be considered to be sufficiently protected after the merger. Thus, the negative declaration has no immediate procedural consequences. See Bunch and Rosenberg (2014), p. 1137. 65 See Thorup and Buskov (2010), p. 178. 66 The Danish Business Authority will include information on the rights of the creditors in the published notification of the intended merger if the shareholders have decided not to obtain an independent experts report or the experts have found that the creditors cannot be considered to be sufficiently protected after the merger, cf. CA § 279(4). See Bunch and Rosenberg (2014), p. 1140. 67 Due claims has to be paid while sufficient security has to be provided for claims that are not due yet.

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companies to proceed with the merger despite an ongoing court case and without jeopardizing the interests of the creditors.68

3.5.2

Approval by the General Meeting of a Cross-Border Merger

In order to ensure that the shareholders have sufficient time to get to know the terms of the merger, CA § 280(1) states that the resolution to implement a merger may be passed no earlier than four weeks after the publication of the Danish Business Authority’s notification of the intended merger and, if relevant, the independent experts’ report on the creditors’ position.69 Moreover, a number of documents must be made available to the shareholders at the company’s registered office or website at least four weeks before the date on which the merger resolution is to be passed. These include the common draft terms and the independent experts’ report, cf. § 280 (5). However, the shareholders may agree that the documents need not be made available to them before the general meeting. Finally, the governing body’s merger statement must also be made available for inspection by employee representatives, or by the employees themselves in the absence of such employee representatives, no later than four weeks before the date on which the merger resolution is to be passed. The 10th Company Law Directive includes a provision in Article 9 on the approval of the cross-border merger by the general meeting. Article 9 leaves it to the Member States to decide on the procedural requirements for the general meeting’s approval and the majority needed to approve the cross-border merger. As a starting point, Article 9(1) states that the merger must be approved in the general meeting of each of the merging companies. However, Article 9(3) includes an exception: if consistent with the Member State’s laws, shareholders of the acquiring company need not approve the merger as long as the conditions laid down in Article 8 of the 3rd Company Directive are fulfilled.70 Article 9 has been implemented in CA § 281 and § 282. According to § 281, the merger resolution must be passed by the general meeting of the non-surviving limited company by at least two-thirds of the votes cast as well as at least two-thirds of the share capital represented at the general meeting, cf. § 106. However, according to CA § 290, in case of a ‘vertical cross-border merger’, the merger resolution may be passed by the central governing body in the non-surviving limited company. In the surviving company, the merger resolution may be passed by the central governing body, unless a general meeting is required to amend the articles of

68 See among others Andersen and Sørensen (2012), p. 251; Hansen (2014), p. 742. The rules are identical for domestic and cross-border mergers. 69 § 280(1) implements the CBM Directive Art. 6. 70 In addition, Art. 9(2) states that the general meeting of each of the merging companies may decide that that resolution is subject to its subsequent approval of the arrangements decided in with respect to the participation of employees. Art. 9(2) is implemented in CA § 284.

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association, cf. § 282(1).71 However, shareholders holding 5% of the share capital, or shareholders with the right to demand a general meeting under the articles of association,72 may also make a written request that the resolution be passed by the general meeting of the surviving limited company. The request must be made no later than 2 weeks after the Danish Business Authority publishes notification of the received merger plan. If the resolution is to be passed by the general meeting of the surviving company, it must be passed by at least two-thirds of the votes cast as well as at least two-thirds of the share capital represented at the general meeting, cf. § CA 106.

3.5.3

Protection of Minority Shareholder Interests

The CBM Directive specifically mentions the need to ensure the interests of minority members who have opposed the cross-border merger, cf. Article 4(2). This is particularly relevant for the company being acquired. As a consequence of the merger, the shareholders of the non-surviving company will receive shares in the surviving company, which is located in a different jurisdiction than the non-surviving company. Consequently, their rights as shareholders will be defined by a set of rules different from those that had applied to their share ownership before the merger. This consideration resulted in a special provision in the Companies Act to protect opposing minority shareholders.73 According to the Companies Act § 286 (1) shareholders in non-surviving companies who have opposed to the cross-border merger in the general meeting may insist that the non-surviving company redeem their shares.74 Opposing shareholders must submit their demand to the company no later than 4 weeks after the general meeting was held. This solution was chosen partly in order to ensure consistency with the solution chosen with regard to the formation of an SE company. The SE Regulation includes in Article 24(2) a provision similar to the CBM Directive Article 7, after which ‘a Member State may, in the case of the merging companies governed by its law, adopt provisions designed to ensure appropriate protection for minority shareholders who have opposed the merger’, including the right to have their shares redeemed before the merger is formalised.75 The preparatory work on the original provision relating to cross-border mergers in the Public Limited Companies Act § 137e(1) (now CA § 286) includes a reference to the provision in the Danish SE Act, but emphasizes that 71

In a very limited number of situations the decision to amend the articles of association can be passed by the governing body of the company, see CA § 282(1). 72 See CA § 89. 73 This is interesting in a Nordic perspective, because the Danish and Swedish companies acts are similar in many aspects and historically have developed largely in parallel lines. However, the Swedish regulators found that the interests of the minority shareholders could not justify provisions that diverged from the provisions regulating domestic mergers. See Danelius (2007), p. 50. 74 See Thorup and Buskov (2010), p. 177. 75 The SE Act § 5, Act No. 363, 2004.

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the two situations are not fully comparable. The formation of an SE company results in a change in the legal status of shareholders in the surviving company as well as in the non-surviving company, which is why the provision applies to all shareholders in the companies involved in the merger.76 As the Danish regulator rightly points out in the preparatory work for the initial provision in the Public Limited Companies Act § 137e, the need for protection of shareholders in the surviving company is limited in a cross-border merger, which is why the right only applies to shareholders in the non-surviving company.77 Such an opt-out provision gives opposing minority shareholders an effective exit option, particularly in small and medium-sized companies where there is no market for the company’s shares. According to the wording of CA § 286, it is the shareholders who opposed the cross-border merger at the general meeting that are granted the right to redemption. This wording does not specify the form of opposition. Thus, shareholders need not have voted against the merger in order to claim their right. It is sufficient they make their opposition known at the general meeting. Hence, shareholders who hold shares with no voting right are provided with a means to exit the company if they oppose the merger. To have their shares redeemed, an opposing shareholder must make a written request to the company no later than 4 weeks after the date of the general meeting. Upon redemption, the limited company must buy the shareholder’s shares at a price corresponding to the value of the shares, cf. CA § 110(3). The Companies Act does not define ‘the value of the shares’, but it is usually the value of the company as a going concern that is applied.78 In the absence of agreement, the value must be determined by experts appointed by the court with jurisdiction over the place where the limited company’s registered office is situated. While § 286 only applies to cross-border mergers, the other provision aimed at protecting shareholder interests, CA § 285, applies to domestic mergers as well. According to § 285(1), shareholders in the non-surviving limited company may claim compensation from the company if the shareholders have made a reservation to this effect at the general meeting at which the merger resolution was passed. This right does not exist if the independent experts reported that consideration offered for the shares is fair and reasonable. In other words, shareholders may claim compensation as long as they have made a reservation at the general meeting and either their position is supported by the independent experts’ report or there is no independent expert report. Any proceeding pursuant to § 285(1) must be commenced within 2 weeks after the merger is adopted by all of the companies participating in the merger. If the shareholders have chosen not to obtain an independent expert report; or if the experts found that the consideration was not fair and reasonable; or if a

76

This was the main argument for the introduction of the right to be redeemed in the SE Act, see Proposal for the SE Act, LFF 142, 2003/1, sec. 2.2.1. 77 Proposal for amendment of the Danish Public Limited Act and of the Danish Private Limited Act, LFF 153, 2006–2007/1, comment on § 137 e. 78 Bunch and Rosenberg (2014), pp. 417 f.

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shareholder has filed a lawsuit against the company with a claim for compensation; then the Danish Business Authority shall not issue the certificate on the cross-border merger. They may only do so when all shareholders’ claims for compensation have been settled, cf. § 285(3) and all shareholders’ claims for redemption have been settled or appropriate security has been provided, cf. CA § 286(2). However, the Danish Business Authority may issue the certificate on the cross-border merger before the expiry of the 2-week period, if the independent experts have found the consideration to be fair and reasonable. This is also the case if a reservation is made under § 285(1), but no lawsuit has been filed.

4 Transfer of the Seat During the 2009 discussions on the revision of the Danish company acts,79 the Committee on the Modernisation of Company Laws suggested that the Danish rules on cross-border mergers and divisions be supplemented with rules on transfer of the company seat to another Member State.80 The majority believed that the rules under consideration would increase organisational flexibility for Danish companies, and the protection of shareholders and other stakeholders could be secured if the rules on cross-border mergers were mirrored. At the same time, a minority believed that regulating the issue should await European harmonisation. The proposal was included in the draft proposed by the Danish government in 2008 more or less as proposed by the committee.81 However, this part of the proposal was abandoned during the negotiations in Parliament. The argument behind the decision was that Denmark should wait for EU harmonisation on the topic.82 However, as the EU did not have any plans at that time to put forward a proposal on the transfer of the seat, this reasoning seems a bit misleading.83 At the time of the adoption of the Companies Act in 2009, it was decided that the Act should be reviewed after 2 years, and the proposal was brought back to life during the revision of the Act in 2012. This time, it was adopted and implemented as Chapter 16a of the Danish Companies Act.84 The Danish rules on transfer of the seat

79

Act 2009-06-12 No. 470. Prior to the 2009 Companies Act it was generally accepted that a reincorporation was not possible according to Danish law, see Birkmose (2004), p. 143; Hansen (2013), p. 73; Andersen and Sørensen (1999), p. 54. 80 White Paper No. 1498 published on 26 November 2008 by the Committee on the Modernisation of Company Laws, Chapter 11.5. 81 Lovforslag 2009-03-25, No. 170, Chapter 17. 82 See Hansen (2013), p. 87. 83 In the Commission Staff Working Document, Impact Assessment on the Directive on the crossborder transfer of registered office, Part I, the Commission concluded that it was appropriate not to proceed with any regulatory developments in relation to transfer of the seat. See SEC(2007) 1707. See also Hansen (2013), pp. 87 f. 84 Act 2013-06-12 No. 616.

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follow the rules on cross-border mergers very closely and they allow companies to transfer their seat into as well as out of Denmark. However, the rules only provide for a transfer of the seat to or from an EU/EEA Member State.85 Initially, the central governing body must draw up and sign a plan for the transfer of the seat and complete a written report that provides explanations and reasons for the plan for the transfer.86 The obligations of the independent experts are identical to those the experts have in a cross-border merger evaluation: the protection of the interests of the creditors relies on the experts’ declaration as to whether the creditors of the limited company can be considered to be sufficiently protected after the transfer. If the independent experts conclude that the creditors will not be sufficiently protected after the transfer, the creditors must follow the same procedure as in a cross-border merger and file their claims to the company. The resolution to implement a transfer of the seat may be passed no earlier than 4 weeks after publication by the Danish Business Authority. The resolution to transfer the seat must be passed at the general meeting with a 2/3 majority, required under CA § 106, and in accordance with any additional rules on dissolution and transfer of the seat provided by the articles of association. Shareholders who opposed the transfer at the general meeting may follow the same procedure as in cross-border mergers to have their shares redeemed by the company. Upon receipt of an application for registration of a transfer of the seat, the Danish Business Authority ensures that all actions and formalities necessary to implement the transfer have been taken or met. The Danish Business Authority will issue a certificate to this effect to the company transferring their seat from Denmark. The certificate will be issued as soon as possible after the following conditions are satisfied: (1) the resolution to transfer the seat has been passed by the general meeting; (2) any claims made by the company’s creditors have been settled; and (3) every request from a shareholder to have his/her shares redeemed by the company has been settled. The final registration of the transfer of the seat in the Danish company register takes place when the Danish Business Authority receives confirmation from the Member State to which the seat has been transferred that the transfer of the seat has been recorded in their register. Thus, the company’s registration in Denmark will not be cancelled before the company is registered in the country of arrival. It should be noted, though, that Companies Act § 318a(2) makes the reservation that a transfer of the seat can only be decided if the legislation in the country which the company wishes to incorporate to or from allows for a transfer of the seat. Moreover, a Danish limited company can only transfer the seat to another Member State if there is a legislative protection of the right of the employees of the Danish company to co-determination in the Member State in which the company re-incorporates. As far as a limited company wanting to transfer their seat to

85

See Hansen (2013), p. 90. The requirements for the content of the plan and the report are very similar to that of the joint merger plan and the written statement in cross-border mergers. 86

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Denmark, the Danish Companies Act only deals with the registration in the Danish Business Register. CA § 318n states that a limited company with its seat in another EU/EEA Member State can transfer its seat to Denmark when the competent authority in the Member State of origin (where the company has had its registered seat) has issued a certificate stating that all conditions on which the transfer relies have been satisfied and that the foreign registration authority accepts the transfer of the seat to Denmark. The Danish Business Authority registers the transfer of the seat after having received the certificate and notifies the competent authority in the former home state as soon as possible that the transfer has been registered. Registration cannot take place before the company complies with the Danish Companies Act. The cross-border transfer of a limited company’s seat to Denmark will come into force on the day of the registration by the Danish Business Authority.

5 Concluding Remarks As mentioned in the introduction, 10 years after the CBM Directive was implemented in Danish company law, cross-border mergers seem to play a relatively small role in cross-border restructuring in Denmark. The exact number of crossborder mergers is uncertain. One source reports that from the time the CBM Directive was implemented in 2007 until May 2014, more than 120 cross-border mergers were registered.87 All of these were mergers by absorption and around two out of three of the surviving companies were registered in Denmark. However, a different study by Bech-Bruun & Lexidale reports that between 14 December 2007 and 1 March 2013 (a shorter period than is used by Bunch and Rosenberg), 77 crossborder mergers involving Danish companies took place, including 39 in which the surviving company was Danish.88 There seems no clear explanation as to why relatively few cross-border mergers involving Danish companies seem to take place, nor has the issue received much attention in the legal literature. The equivalent number of companies transferring their seat to or from Denmark is also limited. On enquiry, the Danish Business Authority replied that around ten companies transfer their seat to or from Denmark per year. Anecdotal evidence suggests that companies prefer more flexible alternatives, in particular setting up corporate groups, to cross-border mergers.89 This apparent lack of impact of the CBM Directive is not a uniquely Danish phenomenon. A 2013 study on the application of the CBM Directive shows that even though the number of cross-border mergers increased by 173% from 2008 to

87

Bunch and Rosenberg (2014), p. 1102. The stated number of cross-border mergers in the 2013 Study was somewhat different. See BechBruun & Lexidale (2013), p. 967. 89 See also Siems (2005), pp. 181 ff. 88

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2012, a number of obstacles still remained,90 including areas where rules are underharmonised or not harmonised at all, problems relating to communication between public agencies across-borders, and obstacles pertaining to safeguards for stakeholders.91 Even though the goals and the potential of the Directive are not fully realized, the Directive still stands as an important milestone in the establishment of an internal market for European companies.

References Andersen PK, Sørensen KE (1999) Free movement of companies from a Nordic perspective. Maastricht J Eur Comp Law 6:47–73 Andersen PK, Sørensen EJB (2012) The Danish Companies Act. Djøf Forlag Bech-Bruun & Lexidale (2013) Study on the application of the cross-border mergers directive, for the Directorate General for the Internal Market and Services Birkmose HS (2004) Konkurrence mellem retssystemer. Delaware-effekten i et europæisk selskabsretligt perspektiv. Thomson, GadJura Birkmose HS (2019) Country report for Denmark. In: Gerner-Beuerle C et al (eds) The private international law of companies in Europe. CH Beck-Nomos-Hart, pp 366–381 Bunch L, Rosenberg I (2014) Selskabsloven med Kommentarer Bunch L, Andersen MH, Johansen TB (2006) Fusion og Spaltning i Praksis. Nordisk Tidsskrift for Selskabsret 4:33–45 Danelius J (2007) Genomförandet av direktivet om gränsöverskridande fusioner I svensk rätt. Nordisk Tidsskrift for Selskabsret 3:47–53 Hansen LL (2006) Fusion, flytning og spaltning over landegrænser. EU-ret og menneskeret 13:189–205 Hansen JL (2013) Grænseoverskridende flytning af hjemsted. In: Neville M, Sørensen KE (eds) Selskaber: Aktuelle emner. Jurist-og Økonomforbundets Forlag, pp 69–95 Hansen SF (2014) Dansk Selskabsret 2, p 742 Madsen JH (2010) Fusion og spaltning i henhold til den nye selskabslov. Nordisk Tidsskrift for Selskabsret 2:76–90 Obling AA, Bunch L (2011) Selskabslovens bestemmelser om grænseoverskridende fusioner og spaltninger – de selskabsretlige regler. Revision & Regnskabsvæsen 8:26–35 Rønfeldt T, Werlauff E (2006) Merger as a method of establishment: on cross-border mergers, transfer of domicile and divisions, directly applicable under the EC Treaty’s Freedom of Establishment. Eur Company Law 3(3):125–129 Schindler CP (2006) Cross-border mergers in Europe – company law is catching up. Eur Company Financ Law Rev 3(1):109–119 Siems MM (2005) The European Directive on cross-border mergers: an international model? Columbia J Eur Law 11:167–186 Siems MM (2007) SEVIC: beyond cross-border mergers. Eur Bus Organ Law Rev 8:307–316 Sørensen KE (2006a) Selskabers mobilitet. Erhvervsjuridisk Tidsskrift, pp 110–221 Sørensen NB (2006b) Grænseoverskridende fusion inden for EU. Nordisk Tidsskrift for Selskabsret 2:75–83 Storm P (2010) Scope and limitations of the cross-border merger directive. In: van Gerven D (ed) Cross-border mergers in Europe, vol I, pp 54–78

90 91

Bech-Bruun & Lexidale (2013), pp. 5 and 9 ff. Including employees. See Storm (2010), pp. 76 f.

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Thorup V, Buskov J (2010) Denmark. In: van Gerven D (ed) Cross-border mergers in Europe, vol I, pp 169–183 Weatherill S, Beaumont P (1999) EU Law, 3rd edn

Hanne S. Birkmose took her PhD in Law at the Aarhus School of Business in 2003. In 2016 she was appointed professor at the Department of Law, Aarhus University. Her research areas include Company Law—in particular International Company Law and EU Company Law—and Corporate Governance, and she has written several national and international articles within these areas. She is also the author of books on UCITS and Alternative Investment Funds in Denmark. Recently, she has mainly worked with shareholder activism and the role of institutional shareholders. In 2014 she received a 3-year research grant from the Danish Independent Research Council for a project on ‘Shareholders’ Duties’. Hanne Søndergaard Birkmose is a member of the ECGI (European Corporate Governance Institute, Brussels), the Nordic Company Law Network and the Nordic Corporate Governance Network.

Cross-Border Mergers in France Bénédicte François

1 Introduction The long-awaited Directive 2005/56/EC of 26 October 2005 has facilitated crossborder mergers in the European Union. Before the publication of the Directive, there was no clear legal framework in place regarding cross-border mergers.1,2 France did not forbid a cross-border merger, like in some others countries.3 But, unanimous consent of the shareholders of the merged company was necessary, as the merger of a French company by a foreign company was considered like a change of nationality. In practice, only a cross-border merger by acquisition of a wholly owned subsidiary was possible. Harmonized rules on cross-border mergers were difficult to adopt, because EU Member States were reluctant to introduce such measures in the name of “economic patriotism”. Furthermore, several were concerned with introducing rules on Employee participation.4 For these reasons, the adoption of the Regulation (EC) N 2157/2001 of 8 October 2001 on the Statute for a European company (SE) and the Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regards to the involvement of employees was a decisive turning point. These legislations served as a model and as a motor for the EU countries.5 Hence, the Cross-border mergers Directive (CBMD) ushered in a

1

Ducouloux-Favard (1990), p. 212. Lecourt (2005), p. 923; Luby (2006), p. 11. 3 This was the case in Austria, Denmark, Finland, Ireland, Greece, Germany, the Netherlands, Sweden (Le Nabasque 2008, p. 493). 4 Ibid. See also Beguin (2001), p. 19. 5 Le Nabasque (2008), p. 493. 2

B. François (*) Paris Est Créteil University (Paris 12), Faculty of Law, Paris, France e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_15

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new era for the European Union.6 Since the implementation of the Directive, an increasing number of companies has carried out cross-border mergers: 1227 crossborder mergers took place within the EU and EEA between 2008 and 2012 (rising from 132 in 2008 to 361 in 2012).7 Since January 2018, mergers and acquisitions have reached almost 1.2 trillion dollars worldwide. With more than 460 billion dollars worth of transactions, the European Union become the most attractive economic zone.8 In France the Cross-border mergers Directive was implemented by the Act n 2008-649 of 3 July of 2008.9 The provisions are found in the Commercial Code10 and in the Labor Code.11 There are no major differences between domestic and cross-border mergers procedures in French national law.12 Rather, cross-border mergers add an additional layer of procedure that must be complied with for such operations.13 This paper will describe the French regime and its main features in order to evaluate its efficiency. We will identify and analyze key areas where France has domestic provisions implementing the Directive which may diverge from those of the other EU Member States: the scope (Sect. 2), the stakeholder protection (Sect. 3) and the procedure (Sect. 4). This paper will also discuss briefly the implications of the recent decision of the Court of Justice of the European Union in the Euro Park Service Case (Sect. 5).14

6 See European Parliament (2017), p. 1; European Parliament (2016a, b), pp. 1–70; Bech-Bruun, Lexidale Study (2013), pp. 424–445; Lecourt (2014), p. 135; Conac et al. (2011), p. 1; Desaché (October 2011), pp. 14–28; Papadopoulos (2011), p. 36. 7 European Parliament (2016a, b), p. 16. 8 Les Échos (29 March 2018) L’Europe propulse le M & A mondial à de nouveaux sommets. https:// www.lesechos.fr/finance-marches/ma/0301498720035-fusions-et-acquisitions-le-marche-tourne-aplein-regime-2165228.php#48MJGcrcMzKlbRev.99. Accessed on 15 April 2018. 9 Loi n 2008-649 du 3 juillet 2008 portant diverses dispositions d’adaptation du droit des sociétés au droit communautaire. 10 French Commercial Code (C. com.), Article (Art.) L. 236-25 to L. 236-32 and Art. R. 236-13 to R. 236-20. 11 French Labor Code (C. trav.), Art. L. 2371-1 to L. 2375-1 and Art. D. 2371-1 to R. 2373-5. 12 Article L. 236-26, paragraph 1, of the Commercial code, refers to the sections 1 to 3 of the Chapter 6, which are related to domestic mergers. These provisions add up to those concerning cross-border mergers, if they do not conflict them. 13 See Bech-Bruun, Lexidale Study (2013), p. 445. 14 CJEU, March 8, 2017, C-14/16, Euro Park Service. Gautier and Hôo (2018), p. 1; Fouquet (2017), p. 733.

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2 Scope 2.1

Companies Concerned

The directive covers all “limited liability companies”.15 French law does not directly refer to the term “limited liability company” (société de capitaux), but lists the companies concerned: corporations (“société anonyme” (SA), limited liability partnerships (“société en commandite par actions (SCA)), European companies registered in France (“société européenne” (SE), simplified limited liability companies (“société par actions simplifiée” (SAS)), and limited liability companies (“société à responsabilité limitée” (SARL)16 under the terms of Article L. 236-25 of the French Commercial Code.

2.2

Entities Excluded

There are no specific provisions regarding cross-border merger of partnerships (“société en nom collectif” and “société en commandite simple”), unincorporated entities, or economic interest groups. These entities could merge but the shareholders must approve the operation unanimously. French national law does not provide for general provisions on cross-border mergers outside the scope of the Directive. On the contrary, the scope of provisions of several Member States is wider than those provided in the Directive. For instance, in the case of Italy: the provisions shall also apply to any kind of company within the meaning of Article 54 of the Treaty on the Functioning of the European Union (TFEU)—even the companies which are not incorporated in the form of limited liability companies, such as commercial partnerships (società semplice, società in nome collettivo, società in accomandita semplice).17 This extension has been adopted to transpose the rationale expressed by the European Union Court of Justice in the Sevic case.18 Moreover, certain types of companies are excluded such as UCITS, or mutual funds: the cross-border mergers are regulated by the Directive n 2009-65 of 12 July 2009.

15 Note that the Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE) dealt only with corporation (SA) and do not encompass limited liability companies (SARL). 16 Cathiard and Poirier (2017), p. 10; Bech-Bruun, Lexidale Study (2013), p. 425; Cathiard (2008), p. 8; Guengant (2008), p. 2000. 17 Bech-Bruun, Lexidale Study (2013), p. 559. 18 CJEU, Grand Chamber, 13 December 2005, aff. C-411/03, Sevic System AG.

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Geographical Scope

The provisions of French Cross-border mergers applies only to the merger of limited liability companies having their registered office, central administration or principal place of business within the European Union, and where at least two of the companies involved are governed by the laws of different EU Member States and where one of the companies is registered in France. Besides, French law explicitly excludes the application of the French law provisions of cross-border mergers to operations involving non-European Economic Area companies.19 However, although French law does not forbid cross-border mergers with non-European Economic Area companies, it does not provide for specific rules.

2.4

Definition of the Term “Merger”

The Cross-border mergers Directive apply to three types of mergers. According to Article 2, paragraph 2, of the Directive, merger means an operation whereby: (a) one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10% of the nominal value (“merger by acquisition”), or, in the absence of a nominal value, of the accounting par value of those securities or shares; or (b) two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company, in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10% of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities or shares (“merger by creation of a new entity”); or (c) a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital (“simplified merger”). French law states in Article L 236-25 of the Commercial code that the legislation of cross-border mergers applies to a “merger,” without any definition.20 But, the French provisions related to cross-border mergers refer to Articles L. 236-1 et seq concerning internal mergers.21 Pursuant to these Articles, a merger is the operation

19

Bech-Bruun, Lexidale Study (2013), p. 426. Ibid. 21 The French provisions refer to section 1 to 3 of the chapter 6 of the Title 3 of the Book 2 of the Commercial code. 20

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by which one or more companies transfers all of their assets and liabilities to another company, which may be an existing company (In French, “fusion-aborption” ou “fusion acquisition”22) or a new one (in French, “fusion par création d’une nouvelle entité”23).24 One or more companies are wound up without liquidation.25 Their assets and liabilities are transferred to an existing company, which then issues new shares. The shareholders of the transferring company receive shares of the acquiring company in exchange for their existing shares and a payment in cash, if the terms of the merger provide for it.26 Furthermore, Articles L. 236-11 et L. 236-11-11 contain specific provisions on the acquisition of a company whose shares are wholly held, or are held at 90% or more, by the acquiring company (in French, “fusion simplifiée”27). In France, the question arose as to whether the operation of “dissolution-confusion” of Article 1844-5 of the Civil Code is a merger which fell within the scope of the directive. According to Art. 1844-5 “The reuniting of all the shares of the capital into a single hand does not involve the dissolution of the firm by operation of law. Any person concerned may apply for that dissolution where the situation has not been regularized within the period of one year. The court may grant the firm a maximum period of six months to regularize the situation. It may not rule for dissolution where, on the day when it decides, that regularization has occurred”. “In case of dissolution, it involves the universal transfer of the patrimony of the firm to the sole member, without there being occasion for liquidation.28 The provisions of paragraph 3 shall not apply to firms whose sole member is a natural person. This operation is not a merger because there is no exchange of shares.29 The only permissible consideration in a merger involving a French company is the shares of the absorbing company, plus a limited payment in cash30 (“cash boot”). Concerning domestic mergers, French law provides that cash consideration cannot

In English, “merger by acquisition” or “merger by absorption”. In English, “merger by creation of a new entity”. 24 Commercial code (C. com.), Article (Art.) L. 236-1. 25 C. com. Art. L. 236-3. 26 Cardi et al. (2017), p. 2. 27 In English, “simplified merger”. 28 According Article 1844-5, the creditors may object to the dissolution within a period of thirty days after the recording of the latter. A judicial decision shall dismiss the objection or order either the payment of the claims, or the constitution of warranties where the firm offers any and where they are considered sufficient. The transfer of the patrimony is carried out and the juridical person vanishes only at the end of the period for objection or, if there is occasion, where the objection has been dismissed in first instance or where the payment of the claims has been made or the warranties constituted”. 29 Le Nabasque (2008), p. 493. 30 In Switzerland, the consideration could be an assignment of receivables (Kalaani 2017, p. 485). 22 23

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exceed 10% of the par value of the shares of the surviving corporation allotted in the merger (10% of the amount of the capital increase resulting from the merger31). But, cross-border mergers are not submitted to the same specifications. France has transposed Article 3(1) of the Directive. Thus, Article L. 236-26, paragraph 1, of the Commercial Code says that payment in cash of more than 10% of the par value or “accounting par value” (“nominal value”) of the transferred equity of the acquiring company is allowed when the legislation of at least one of the Member States concerned permits it. The accounting par value should correspond to the fraction of the company’s capital represented by one share.32 Therefore, under French law, for cross-border mergers, cash payment can exceed 10% of the accounting par value or the nominal value of the capital of the company resulting from the cross-border merger, whether the French company is the surviving or the disappearing company.33 However, the French favorable tax treatment does not apply if the cash consideration exceeds 10%, as the French General Tax Code provides that such favorable merger tax treatment implies that the cash consideration cannot exceed 10%.34 These points have to be carefully examined. Triangular mergers (or subsidiary mergers) are not allowed under French law.35 The target constituent company is merged with a newly-created subsidiary (the mergersub) of the acquiring parent company, with either mergersub continuing as the surviving corporation (a forward triangular merger) or the target company continuing as the surviving corporation (a reverse triangular merger). The shareholders of the target constituent company in the merger receive shares in the acquiring parent and not the constituent company in the merger. This is contrary to the United States Corporate Law where all cash-mergers or mergers involving debt consideration are not permitted.36 Besides the cross-border merger procedure is not allowed when the company is undergoing liquidation and has already started asset distribution.37 No specific French rules apply to cross-border divisions. Such operations must comply with domestic merger rules. Unanimous consent of the shareholders is required if the division entails a change of nationality. These operations are regulated by Articles L. 236-1 et seq. of the Commercial code.

31

C. com., Art. L. 236-1; See Cardi et al. (2017), p. 8. C. com., Art. L. 236-26, paragraph 2. 33 Bech-Bruun, Lexidale Study (2013), p. 426. 34 Code général des impôts (General Tax Code), Article 210A; See Cardi et al. (2017), p. 12; Herrmann and Provost (2011), p. 38. 35 Cardi et al. (2017), pp. 3–4; Barrière (2013). 36 Cardi et al. (2017), p. 4. 37 C. com., Art. 236-1, paragraph 3. 32

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3 Protection of Public Interest and of Various Stakeholders 3.1 3.1.1

Opposition to a Merger on Public Interest Grounds Possible Grounds of Opposition

According to Article 4(1)(b) of the Directive, the laws of a Member State enabling its national authorities to oppose a given internal merger on grounds of public interest shall also be applicable to a cross-border merger where at least one of the merging companies is subject to the law of that Member State; this provision shall not apply to the extent that Article 21 of Regulation (EC) No 139/2004 on the control of concentrations between undertakings is applicable. In France, this option was not implemented in the national legislation. French law does not provide for the possibility for the national authorities to oppose a cross-border merger on “public interest grounds”, with the exception of EU and French competition law regulatory restrictions.38

3.1.2

Competition Law Regulatory Restrictions

The Cross-border mergers Directive does not provide for specific provisions on the control of concentrations. Under the terms of recital 9, the Directive “is without prejudice to the application of the legislation on the control of concentrations between undertakings, both at Community level, by Regulation (EC) No 139/2004, and at the level of Member States”. In France, the Antitrust Authority (the “Autorité de la concurrence”) can oppose merger projects that might jeopardize the competitiveness of the market.39 Pursuant to Article L. 430-2 of the Commercial Code, any merger operation within the meaning of Article L. 430-1 is subject to the provisions of Articles L. 430-3 et seq. when the combined aggregate worldwide turnover exclusive of tax of all of the companies or of all of the natural persons or legal entities involved in the merger is greater than 150 million euros; the combined aggregate turnover exclusive of tax achieved in France by at least two of the companies or groups of natural persons or legal entities concerned is greater than 50 million euros; the operation does not come within the scope of Council Regulation No. 139/2004 (EEC) of 20 January 2004 relating to control of concentrations between undertakings. The concentration must be notified to the Autorité de la concurrence (Antitrust Authority) prior to its completion. This notification shall be made by all the parties concerned when they can demonstrate a good faith intention to conclude an

38 39

Bech-Bruun, Lexidale Study (2013), p. 429. Cathiard and Poirier (2017), p. 47.

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agreement, and particularly when they have signed an intended agreement, a letter of intent or, in the case of a public bid, when they have publicly announced an intention to make such a bid.40 The notification is published on the web site of the Autorité de la concurrence. This is so the third parties may make comments. The Autorité de la concurrence examines briefly, in 25 days, the operation and authorizes the concentration or authorizes the concentration with some undertakings (“Phase 1”).41 The Autorité de la concurrence could proceed with an in-depth analysis of the operation of concentration, if needed (“Phase 2”).42 The procedure lasts 65 days. The Autorité de la concurrence reaches a decision: the Authority authorizes the concentration, with (or without) undertakings, or forbids the operation.43 Moreover, according to Article L. 430-7-1. - I, when the Minister of Economy receives the decision of the Autorité de la Concurrence reached during the “Phase 1” procedure, the Minister of Economy could ask the Autorité de la concurrence to examine the operation in a “Phase 2” approach. In addition, according to Article L. 430-7-1. - II, when the Minister of Economy receives the decision of the Autorité de la Concurrence, the Minister is entitled to examine the operation on “public interest grounds”, other than to safeguard the competition (for instance the competitiveness of the enterprises, the industrial development, the creation or the maintenance of employment. . .) and to make a decision concerning the proposed operation. Hence some strategic industries (defense, transportation, media, press, banking, insurance, etc.) may be subjected exceptionally to the veto power of the Minister of Economic Affairs. The decision is transmitted to the Autorité de la concurrence. Thus, a concentration operation cannot be carried out until after the agreement of the Autorité de la concurrence and, where applicable, of the minister responsible for the economic sector concerned.44 If a concentration has been carried out without being notified, the Autorité de la concurrence may impose a financial penalty whose maximum amount shall be, for legal persons, 5% of their pre-tax turnover made in France during the last closed financial year, plus, if applicable, the turnover which the acquired party made in France during the same period, and, for natural persons, 1.5 million euros.45 If the companies do not fulfil the undertakings prescribed, the Autorité de la concurrence could, by injunction, order the company to fulfil them, or withdraw the authorization, or pronounce a financial penalty which can not exceed the maximum of the above-mentioned penalties.46

40

C. com., Art. L. 430-4. See C. com., Art. L. 430-5. 42 C. com., Art. L. 430-7. 43 See C. com., Art. L. 430-6. 44 C. com., Art. L. 430-4. 45 C. com., Art. L. 430-8. 46 C. com., Art. L. 430-8. - IV. 41

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Defense of “Strategic” Industries

On another note, the acquisition of control of a French company by a foreign investor involved in some “strategic” industries (defense, arms trade, etc.) requires the prior approval of the French Minister of Economy.47 The list of the sectors concerned would be extended to the artificial intelligence industry, the data storage industry, the semiconductor industry, and the space domain.48 This measure would figure an “Action plan for the growth and the transformation of Enterprises” in the future, scheduled for May 2018. A follow-up on these foreign acquisitions would be planned and the new framework would include the possibility to pronounce dissuasive penalties for noncompliance. In addition, the economic committee of the Defense and National Security Council would be entitled to anticipate the risk of a hostile takeover or a change in control; the French public investment Bank “Bpi France” would be allowed to make specific loans and loan guaranties to these strategic enterprises and the French Government Shareholdings Agency (Agence des Participations de l’État) could participate in the equity of these companies. Thus, in the coming years, cross-border mergers should be subjected to an increased oversight by the State.

3.2 3.2.1

Stakeholder Protection Creditor Protection

Ordinary Creditor Opposition There are two different creditor protection systems: ex ante and ex post systems.49 In France, an ex ante system prevails. French law also has not adopted rules regarding creditor protection specific for cross-border mergers.50 Domestic merger rules apply. Creditors of companies participating in the merger operation and whose claims predate the publication of the merger plan can oppose the proposed merger before the Commercial Court.51 The protection period starts within 30 days from the last publication of the proposed merger, or the advertising of the proposed merger on the website of the company.52 Besides France does not grant creditors veto rights over the merger. The filing by a creditor of a notice of opposition does not suspend the

Monetary and Financial Code (C. mon. fin.), Art. L. 151-3 and Art. R. 153-1. Ministère de l’économie (19 February 2018) Extension du décret de 2014: mieux protéger les entreprises stratégiques françaises, Communiqué. 49 European Parliament (2016a, b), pp. 17–19. 50 Cathiard and Poirier (2017), p. 104; Chacornac (2016), p. 1404. 51 C. com., Art. L. 236-14, paragraph 1. 52 C. com., Art. R. 236-8, R. 236-2 and R. 236-2-1. 47 48

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merger proceedings and the opposition does not prevent the merger operation.53 The Commercial Court may reject the opposition, or order either the payment of the debt, or the grand of collateral to secure the creditors debt if the acquiring company offers this and if these are deemed sufficient.54 If the company fails to pay or the formation of the guarantees ordered by the court, the merger has no effect to the creditor. Thus, creditors can disturb the merger and, upon a court decision, receive an anticipated refund and additional guarantees. In some others countries, like Italy, an ex-post system prevails.55 The merger is suspended for 60 days after the filing of the merger deed with the Register of the Enterprises, unless one of the following three conditions is fulfilled: the creditors consented to the merger; all non-consenting creditors have been paid in full; the sum necessary to pay the dissenting creditors has been deposited in a bank as a guarantee of their credit. During the 60 days timeframe, creditors can essentially block the merger. Therefore, in the case of a cross-border merger involving entities in both France and in Italy, advisors do not only have to deal with complex creditor protection systems, they also have to accumulate the two statutory periods because one is ex-post and the other is ex-ante.56 In practice, the risk to make an early payment to one or more creditors may call into question the entire operation.57 The cross-border mergers directive should be amended on this point. A better harmonization is needed. Note that only the ex-ante mechanism which allows creditors to exercise their right of opposition before the approval of the merger presents the further advantage to offer shareholders the possibility to abandon the entire operation.

Bondsholder Protection If the absorbing company is a French company, the merger plan does not have to be submitted to its bondholders. Article L. 236-15 provides that a merger plan is not submitted to the acquiring company’s bondholders’ meetings. However, the general meeting of bondholders may empower the body’s representatives to oppose the proposed merger under the conditions set out by Article L. 236-14. If the French company is absorbed, the latter may choose between one of two solutions laid down in Article L. 236-13 and in Article L. 228-73. Article L. 236-13 specifies that the merger plan is submitted to the bondholders’ meetings of the absorbed company, unless the said bondholders are offered on-demand redemption of their bonds. Bondholders have a three-month period from the last formality of publicity to ask for the reimbursement of their bonds.58 When on-demand redemption is offered, the

53

C. com., Art. L. 236-14, paragraph 3. C. com., Art. L. 234-14, paragraph 2. 55 Bech-Bruun, Lexidale Study (2013), p. 564; European Parliament (2016a, b), pp. 39–40. 56 European Parliament (2016a, b), p. 40. 57 Le Nabasque (2013), p. 412; Le Nabasque (2008), p. 493. 58 C. com., Art. R. 236-12. 54

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acquiring company becomes the debtor with respect to the acquired company’s bondholders. Based on Article L. 236-13, the question has arisen as to whether French law offers the same protection to the holders of bonds issued by a foreign disappearing entity when the surviving entity is French, especially if the foreign law does not provide for equivalent protection. There is no consensus on this point.59 Article L. 228-73 describes the situation when the merger plan is submitted to the bondholders’ meetings of the absorbed companies. If the bondholders’ general meeting deliberates on the cross-border merger and if the general meeting approves the proposed merger, all bondholders of the relevant category automatically become, under the same conditions, the bondholders of the absorbing company. If the bondholders’ general meeting does not approve, the merger is not blocked. According to said Article L. 228-73, last modified by Article 13 of the Ordinance n 2017-970 of 10 may 2017 improving the development of bond issues,60 the board of directors, the executive board or the executives of the debtor company may carry on regardless. The bondholders then retain their status in the absorbing company. However, the bondholders, through their representatives, may oppose the merger under the same conditions and effects as those described, for ordinary creditors, in Article L. 236-14 above-mentioned.61

3.2.2

Minority Shareholder Protection

France has not adopted rules regarding minority shareholder protection specifically for cross-border mergers.62 Domestic merger rules apply.

Information Right Any joint-stock company involved in a merger shall make documents including the draft merger, the board of directors report, the auditors’ report, annual accounts approved by the general meetings and the management reports of the last three years of all the companies participating in the operation, and financial statements63 available to its shareholders at the registered office, at least 30 days prior to the shareholders meeting. Every shareholder can obtain a copy of these documents free of charge. But, a limited liability company (SARL) shall only make the auditors’ report on the merger64 available to its partners. Moreover, since the Act n 2011-525 of 17 May 2011, the availability of these documents is not required if the company

59

Cardi et al. (2017), p. 21. Endreo (2017), p. 416. 61 C. com., Art. L. 228-73. 62 Bech-Bruun, Lexidale Study (2013), p. 430; European Parliament (2016a, b), p. 19. 63 C. com., Art. R. 236-3; Cathiard and Poirier (2017), p. 106. 64 C. com., Art. R. 236-3, paragraph 4. 60

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makes these documents available on its website, free of charge, for a continuing period starting at least 30 days prior to the general meeting.65

Abuse of Majority Moreover, minority shareholders can seek the nullity of the shareholders meeting on the grounds of a legal action named “abuse of majority” before a court. Abuse of majority occurs when the majority shareholders had not acted in the corporate interest, but in their own, to the detriment of the minority shareholders. Precisely, the Court of cassation held that the majority shareholders abuse their voting rights when a contested resolution is taken contrary to the corporate interest and with the sole purpose of favoring members of the majority to the detriment of members of the minority.66 The abuse of majority, if it is found, generally results in the nullity of the decision taken. This nullity may be requested by shareholders, even if they voted in favor of the adoption of the contentious resolution.67 Other sanctions are possible. Minority interests may also obtain damages, but for this reason they must assign not the company but the majority.68 Finally, they have the possibility to ask for dissolution of the company.69 The outcome of such legal action, however, is random. Contrary to numerous Member States, France does not allow minority shareholders with a withdrawal right, a procedure to scrutinize and amend the ratio applicable to the exchange of shares, or a procedure to compensate minority shareholders.

Shareholder Approval According to Article 9 of the directive, the General Meeting of shareholders of each of the merging companies has to approve the Draft Merger. French internal law has already provided for such shareholder approval. Shareholder decision rules for cross-borders mergers are quite the same as those of domestic mergers. At the general meeting, the shareholders will discuss a substantial amendment of the statute. Therefore, the constitutive quorum and the majority required should be those provided for amending the corporate statute. Procedural requirements including majority, quorum, and timing depend on the company’s corporate form. Usually a two-thirds majority of shareholder votes is sufficient. For instance, in a corporation

65

C. com., Art. R. 236-3-1. Court of Cassation (Cass). Com. 18 April 1961, Bull III, No. 175, See also Cass. Com. 6 June 1990, Bull Joly Sociétés Dalloz, 1990, 782, note P. Le Cannu; Cass. Com. 1 July 2003, Bull Joly Sociétés 2003, 1137, note A. Constantin. 67 Cass. com 6 June 1990, cited above. 68 Cass. com 6 June 1990, cited above. 69 Cass. com 18 May 1982, Revue des sociétés Dalloz 1982, p. 804, note Cannu; Cass. com., 8 Feb. 2011, Revue des sociétés Dalloz 2011. 167, note A. Lienhard. 66

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(“société anonyme”), the majority requirement is two-thirds of the quorum, and the quorum requirement is at least one quarter of all voting shares upon first call of the extraordinary general meeting and one fifth on second call.70 Shareholders can approve the entire draft merger, reject the entire draft merger, or amend some provisions, including the ratio of exchange of shares. In France, there are no more others formalities. For instance, in Italy, the activities of the assembly must not be notarized.71 But, in a cross-border merger, a shareholder’s vote concerns two additional points. Pursuant to Article L. 236-28 of the French Commercial Code, the shareholders who decide on the merger may make the completion of the merger contingent on their approval of the arrangements concluded for employee participation, as defined in Article L. 2371-1 of the French Labor Code, in the company resulting from the cross-border merger. The decision taken in application of these procedures is binding on the company derived from the merger. According to Article L. 236-28, paragraph 2, the shareholders of a French company, who vote on the cross-border merger, decide, in a separate resolution, on the possibility of implementing the procedures for scrutinising and amending the ratio applicable to the exchange of shares, or for compensating minority shareholders, if the law of a Member State to which a merging company is subject provides for this possibility. The decision taken in application of these procedures is binding on the surviving company. These provisions derive from Article 10, paragraph 3, of the CBMD, which provides that “If the law of a Member State to which a merging company is subject provides for a procedure to scrutinise and amend the ratio applicable to the exchange of securities or shares, or a procedure to compensate minority members, without preventing the registration of the cross-border merger, such procedure shall only apply if the other merging companies situated in Member States which do not provide for such procedure explicitly accept, when approving the draft terms of the cross-border merger in accordance with Article 9(1), the possibility for the members of that merging company to have recourse to such procedure, to be initiated before the court having jurisdiction over that merging company”. We will recall that France has not adopted measures to amend the share-exchange ratio or to compensate minority shareholders. In practise, the shareholders of the French company should approve the right to the other company shareholders to benefit their withdrawal right or to amend the said ratio. It is sometimes difficult to persuade the minority shareholders of the French corporation to adopt a decision which does not benefit them. Therefore, Article L. 236-28, paragraph 2, was criticized “as a fairly abstruse provision”.72 Besides, the Clerk may issue the pre-merger certificate73 (“declaration of conformity”) even if the procedure of approval has just commenced. The certificate must then indicate that the procedure is pending. This procedure seems to be complicated. In fact, the shareholders’ decision shall be binding on the company

70

C. com., Art. L. 225-96; Cardi et al. (2017), p. 23. Italian Civil Code, Art. 2504; See Bech-Bruun, Lexidale Study (2013), p. 574. 72 Le Nabasque (2008), p. 493. 73 See infra n 34; C. com., Art. L. 236-29, paragraph 2. 71

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resulting from the cross-border merger and all its members. But the exercise of those minority rights will not suspend the completion of the merger. On the contrary, if the shareholders of the French company refuse to approve, what are the consequences? During the Parliamentary review of the bill implementing the Directive, a Senate Report has indicated that, in case of refusal by the shareholders, only the shareexchange ratio or the compensation already provided will be set up.74 Moreover, Article L. 236-2 does not specify any particular stipulation if the resulting company is not French. The procedure of paragraph 2 should apply. However, the solution hardly seems logical: the shareholders of the French merging company will decide whether or not this minority protection mechanism will be implemented, while their company will be eventually absorbed and dissolved.75

Simplified Procedure A simplified procedure exists when the surviving company holds all the shares in the absorbed company or when the surviving company holds at least 90% of the shares of the absorbed company. When the absorbing company owns all the shares of the absorbed company, there is no need for the shareholders of the absorbed company and the absorbing company to approve the merger.76 No new shares are allotted by the acquiring company and there is no exchange ratio.77 However, one or more shareholders of the absorbing company holding at least 5% of the share capital may request the convening of an extraordinary general meeting of the absorbing company for a ruling on the approval of the merger. The company is also exempted from preparing explanatory reports on the Merger (i.e. the manager report mentioned in Article L. 236-9, al. 4, and the auditor report described in Article L. 236-10) and from appointing merger auditors. When the absorbing company detains at least 90% of voting rights of the absorbed company, there is no need for approval of the merger by the meeting of the absorbing company.78 However, one or more shareholders of the absorbing company holding at least 5% of the share capital may request the convening of an extraordinary general meeting of the absorbing company for a ruling on the approval of the merger. The absorbing company is exempted from establishing the manager and auditor reports, provided the minority shareholders of the absorbed company are offered, prior to the merger, the purchase of their shares by the absorbing company at a fair price determined, and if the shares are not admitted to trading on a regulated market, by an independent expert of Article 1843-4 of the civil code79 or fixed under 74

Sénat (2008), p. 48. Le Nabasque (2008), p. 493. 76 C. com., Art. L. 236-11. 77 Cardi et al. (2017), p. 26. 78 C. com., Art. L. 236-11-1, 1 . 79 C. com., Art. L. 236-11-1, 2 ; See Bech-Bruun, Lexidale Study (2013), pp. 434–435. 75

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the conditions laid down in the General Regulation (Règlement général) of the French Financial Markets Authority (“Autorité des marchés financiers”, if the shares are listed on a financial market (regulated or not).80

3.2.3

Employee Participation

Principle One of the main labor law issues surrounding EU cross-border mergers is the employee participation within the management bodies of the receiving company.81 Applying the “before and after” principle provided by the Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees, Article 16 of the Cross-Border Mergers Directive states a general principle: the company resulting from the cross-border merger shall be subject to the rules in force concerning employee participation, if any, in the Member State where it has its registered office. Thus, the employees’ rights of participation are governed by the national laws of the receiving company. Under French company law, the articles of association of a corporation (“société anonyme”—SA) may provide that some directors who represent no more than one third of the total members of the board may be appointed by the employees.82 Such provisions are mandatory for companies whose shares are admitted to trading on a regulated market (listed “sociétés anonymes”). One, or more members of the board of directors must be elected by the general meeting of the shareholders, upon proposal of the employees holding more than 3% of the company’s share capital. Since the Act n 2013-504 of 14 June 2013,83 employees participate in the management of the company and can formally influence it, as they have the right of appointing their members to the board of administration if the company (and its subsidiaries) have, at two consecutive financial years at least 1000 employees in France or 5000 employees worldwide.84 Their number is at least two if the board comprises at least thirteen, and one, if the number is no higher than twelve.85 In the context of the future “Action Plan For the The Growth and the Transformation of the 80

General Regulation (Règlement général) of the AMF, Art. 234-6. European Parliament (2016a, b), p. 21. 82 C. com., Art. L. 225-27 and L. 225-79. According to Article L. 225-27 concerning the “société anonyme” with a board of directors, the number of these directors can not be higher than four in the SA whose shares are not admitted to trading on a regulated market, or five in the company is non listed. 83 The above-mentioned Act of 2013 (“Loi relative à la sécurisation de l’emploi”) was modified by the Act n 2015-994 of 17 August 2015 (“Loi relative au dialogue social et à l’emploi”). 84 C. com., Art. L. 225-27-1. 85 According to the Report of Ethics & Boards, the number of the employee directors has increased more than threefold since the Act of 14 June 2013, rising from 37 to 95 (IFA et Ethics & Boards 2017, p. 1). 81

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Enterprises” (“Plan d’action pour la croissance et la transformation des entreprises”), a report published on 9 March 2018 have suggested that all the corporation must be managed according to its own interest, whilst taking account of the social and environmental considerations of its activity.86 Corporate social responsibility (CSR) would inspire and underlie the strategy of each enterprise. This reform also paves the way to the recognition of the benefit corporation in France. Moreover, the report has suggested to reconsider the thresholds triggering the designation of an Employee director provided by Article L. 225-27-1 of the Commercial Code.87 The companies of more than 500 employees would be concerned. The authors have recommended enhancing, in 2019, the number of the Employee Directors, to two if the board of the company comprises eight non-executive directors and to three if the board comprises at least thirteen non-executive directors.

Exceptions However, there are exceptions to the principle provided by Article 16 of the CrossBorder Mergers Directive. These provisions figure in Articles L. 2372-1 to L. 2375-1 of the French Labor Code. These above-mentioned rules will not apply if: (i) at least one of the merging companies has, within six months before the publication of the merger an average number of employees exceeding 500 and operating under an employee participation system,88 or (ii) the national law applicable to the surviving entity 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 or their committees or of the management group which covers the profit units of the company, subject to employee participation; or (iii) the national law applicable to the surviving entity does not provide for employees of establishments of the company resulting from the cross-border merger 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. Procedures very close to those concerning employee participation set out in the Statute of the European Company apply.89 A “special negotiation group” (SNG) (in French “groupe spécial de négociation”), endowed with legal personality, will be set up to negotiate the level and modalities of employee participation in the management of the surviving entity. 86

See proposed Article 1833 of the French Civil code (“la société doit être gérée dans son intérêt propre, en considérant les enjeux sociaux et environnementaux de son activité”), in Notat and Senard (2018), p. 6. 87 Notat and Senard (2018), p. 7. 88 Cardi et al. (2017), pp. 14–15; Mastrullo (2009), p. 22. 89 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE) and Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees, above mentioned, supra n 1.

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The SNG is composed of employee representatives of the merging companies, and their branches and subsidiaries, in each relevant European country.90 It requires the prior election of employee representatives in each such company, branch or subsidiary. Hence, the formation of a Special Negotiation Group and the negotiation process can be time-consuming. The negotiations can last up to six months unless the parties exercise their option to extend the negotiations for a further six-month period.91 Thus, when the feasibility of a cross-border merger is studied, employee participation is often a decision-making driver. Since the Law of 2013, more French companies must appoint employee representatives on their board of directors. As a result, a Special Negotiation Group is more likely to be required when a large French company is involved in a cross-border merger. Some authors have suggested to modify the timeline established for the formation of the SNG.92 In order to save time, the negotiation process should begin before the publication of the merger draft and could be run in parallel with others negotiations and informing and consulting processes.93 We recall that the completion of the cross-border merger can not exceed one year, the draft merger must be filed with the company register at least one month before the day fixed for the general meeting which is to decide on the draft merger,94 and the prescribed deadline to constitute the SNG is fixed at six months, renewable once, after the publication of the merger draft.95 In practice, these deadlines are difficult to articulate with each other. Moreover, pursuant to Article L. 236-32, if one of the merging companies is subject to employee participation and if the resulting company is also subject to employee participation, that company must take a legal form allowing the exercise of participation right. The company has to take appropriate measures to ensure that within a period of three years the employee participation is protected also in the event of subsequent domestic mergers. At last, Article L. 2371-2 of the Labor Code establishes that the surviving company is not subject to employee participation if none of the merging companies are subject to these provisions. In this case, the companies participating in the crossborder mergers do not have to engage in negotiations.96

90 Article 3 of the Directive 2001/86/EC above mentioned; Labor Code, Art. L. 2371-4 and L. 11112; See also Cardi et al. (2017), p. 15. 91 See Labor Code, Art. L. 2352-1 and L. 2352-9. 92 Le Nabasque (2013), p. 2; Bonasse and Gaillard (2013), p. 53. 93 Ibid. 94 C. com., Art. L. 236-6 and R. 236-15. 95 See Labor Code, Art. L. 2352-1 and L. 2352-9. 96 Lencou and Menjucq (2009), p. 886.

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4 Procedure 4.1 4.1.1

Procedure Before the Shareholder Approval Common Draft Terms of Cross-Border Mergers

The management body of the companies participating in a cross-border merger draws up the common draft terms of merger (“Draft merger” or, in French, “projet de fusion”). The common draft terms of a Cross-Border Merger content some extra information in comparison to a basic draft merger. According to Article R. 236-14 of the Commercial Code, the draft merger must include, in particular, the type, name, registered office and governing law of the surviving company, as well as the governing law of each participating company; the cash exchange ratio and, if any, the amount of the cash payment—we will emphasize that a cash payment exceeding 10% of the nominal value may be provided for97—; the conditions in which the acquiring company’s shares will be remitted to the shareholders of the disappearing company; the date from which the operations of the disappearing entity will be considered, from an accounting standpoint, as being accomplished by the acquiring company; any special conditions concerning the right of shareholders of the surviving company to share in profits ; the date from which the new holders (of the securities of the company resulting from the merger) have the right to dividends ; any special advantages granted to the experts who examine the draft terms of the cross-border merger or to members of the supervisory bodies of the merging companies; information on the evaluation of the assets and liabilities which are transferred to the company resulting from the cross-border merger; reference dates of the merging companies’ accounts used to establish the terms of the cross-border merger; the articles of association of the surviving company; where appropriate, information on the procedures by which arrangements for the involvement of employees in the definition of their rights to participate in the company resulting from the cross-border merger are determined; and likely effects of the cross-border merger on employment.98 At least 30 days prior to the general meeting, the draft merger must be filed with the clerk of the commercial court of the jurisdiction in which the registered office of the French merging company is located.99 In addition, a notice of the merger agreement has to be published, within the same period, in a local gazette (in French a “journal d’annonces légales”)100 and in the Official Bulletin of the civil and commercial announcements (“Bulletin des annonces civiles et

97

C. com., Art. L. 236-26. See Cardi et al. (2017), pp. 15–16. 99 C. com., Art. L. 236-6 and R. 236-5. 100 This formality does not exist anymore in an internal merger (C. com., Art. R. 236-2, modified by Decree n 2011-1473 of 9 November 2011). 98

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commerciales”—BODACC).101 The notice must contain the corporate name, corporate form, registered office, amount of share capital, registration number with the Registry of Enterprises of all the participating companies; the share-exchange ratio; the valuation of the assets and liabilities to be transferred to the acquiring company; the contemplated amount of the merger premium; the date of entry into the merger agreement; information on creditor protection rights and minority shareholder rights. In practice, the timeline must be discussed and agreed with the clerk of the commercial court: in several cases, note some distinguished practitioners, it has not been possible to guarantee the publication in the BODACC less than 10 days after the filing of the draft common terms with the commercial court, which means that the 30-day deadline for filing the draft common terms may actually be longer.102 Fortunately, the publication of the notice of the Draft Merger in a local gazette and in the BODACC is not necessary if the company makes this document available on its website, free of charge, for a continuing period starting at least 30 days prior to the general meeting.103

4.1.2

Management Report

In accordance with Article 7 of the Directive, Article L. 236-27 of the French Commercial Code provides that the management of each participating company104 has to establish a report which shall be made available to the shareholders, and to the employee delegates or, in the absence of such delegates, to the employees themselves.105 This report explains the legal and economic aspects of the merger.106 It must also explain the share exchange ratio and valuation methods used. The management report has to be made available to the shareholders and to the employees at the registered office 30 days before the date of the general meeting.

4.1.3

Independent Report

Article 8 of the Directive requires an independent expert report to be drawn up for the shareholders, in order to receive independent advice on the terms of the merger. 101

C. com., Art. R. 236-15. See Cardi et al. (2017), p. 18. 103 C. com., Art. R. 236-2-1. 104 We should note that the management report is not required in a domestic merger involving a limited liability company (“société à responsabilité limitée”—SARL). It is mandatory in a crossborder merger involving such a company. 105 See Bech-Bruun, Lexidale Study (2013), p. 432. 106 Under certain conditions, the opinion of the employee delegates is appended to the management report (C. com., Art. L. 236-27, paragraph 3). In addition, the management of the French merging company is required to inform and consult the work council before the board meeting approving the draft merger (French Labor Code, Art. L. 2323-1 et seq.; See Cardi et al. 2017, p. 14). 102

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Prior to the directive, Article L. 236-10 of the French Commercial Code already provided for cases where an independent expert report (“rapport du commissaire à la fusion”) was necessary.107 The report must indicate the different criteria utilized to calculate the proposed exchange ratio; the adequacy of the methodology followed in determining the exchange ratio; the possible difficulties implied by the choice of one method over the other which must be signaled and explained. Article L. 236-10 has been updated to transpose the possibility for the shareholders to unanimously waive the requirement of this expert report. Besides, the intervention of any independent expert is excluded in a merger by acquisition of a wholly owned subsidiary and in a merger by acquisition carried out by a company holding 90% or more of its subsidiary shares.108 But, a contribution auditor (“commissaire aux apports”) must be named if contributions in kind and/or special benefits are made and if a merger auditor was not appointed. These formalities accomplished by the merger auditor or by the contribution auditor are burdensome. Furthermore, the obligation to nominate a contribution auditor seems to contradict Article 8 of the Directive. A modification of the provisions of French mergers is needed. Moreover, the determination of the share exchange ratio is a difficult issue in practice.109 The valuation methods differ from jurisdiction to jurisdiction (e.g. the multi-criteria approach in Italy, or the discounted cash flow valuation in Germany110). There are no specific provisions in the cross-border mergers Directive. In order to circumvent difficulty, the acquiring company often decides to acquire the entire share capital of the targeted company, before the commencement of the crossborder merger.111 The merger is then realized through the simplified merger procedure. Nevertheless, these operations are costly. . .

4.2 4.2.1

Pre-merger Certificate and Scrutiny of the Legality of the Merger Absence of Causes of Nullity

A merger is a laborious and time-consuming process. It would have been unrealistic for the European Legislator to provide for an action of nullity of a cross-border merger and to admit the possibility of erasing all traces of the operation. Moreover, the consequences of nullity differ from jurisdiction to jurisdiction. Therefore, the Directive has subordinated the effects of the cross-border merger to the scrutiny of

107

See Le Nabasque (2008), p. 493; Bech-Bruun, Lexidale Study (2013), pp. 433–435. C. com., Art. L. 236-11 and L. 236-1-1 above mentioned supra n 24; See Larcena and CollyChenard (2013), p. 8. 109 Martin (2011), p. 47; Le Nabasque (2013), p. 4. 110 Kalaani (2017), pp. 487–488. 111 Ibid. 108

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the legality of the operation and has provided that, once the cross-border merger has taken effect, it may no longer be declared null and void. Firstly, according to Article 10 and 11 of the Directive, the cross-border merger is subjected to a two-step control: the scrutiny of the compliance with the pre-merger requirements and the scrutiny of the legality of the merger. These Articles are intended to ensure legal certainty. However, some difficulties remain.

4.2.2

Pre-merger Certificate

Pursuant to Article 10, paragraph 1, each Member State shall designate the court, notary or other authority competent to scrutinize the legality of the cross-border merger with regards to part of the procedure which concerns each merging company subject to its national law. Paragraph 2 provides that “In each Member State concerned, the authority referred to in paragraph 1 shall issue, without delay to each merging company subject to that State’s national law, a certificate conclusively attesting to the proper completion of the pre-merger acts and formalities”. There will be as many pre-merger certificates as merging companies involved.112 French law has already provided under the terms of Article L. 236-6, paragraph 2, of the Commercial Code that all companies which participate in an internal merger are required to file a “declaration of conformity”, in which they assert that the operations were conducted in accordance with applicable rules and regulations; the clerk of the Commercial Court ensures, under its responsibility, the compliance of this statement. Since the implementation of the Directive, Article L. 236-29, paragraph 1, concerning the cross-border mergers refers to this Article L. 236-6, paragraph 2. The requirements are the same in both operations. But, in a cross-border merger, Article L. 236-29 also prescribes that the certificate must indicate if a procedure to scrutinize and amend the share exchange ratio or a procedure to compensate minority shareholders is underway, assuming that the shareholders of the French merging company has approved, by a special resolution, that such a procedure could be continued. This point would be difficult to apprehend. Besides, the pre-merger certificate is necessary for a cross-border merger involving limited liability companies. We should note that, since the Law n 2014-1545 of 20 December 2014, this certificate is required only in an internal merger involving corporations or European companies (societas europeae—SE), limited liability companies are a contrario excluded by this provision.113

112

In an internal merger, a single declaration of conformity may be established by all the merging companies (Court of cassation, com. 27 May 2008, Bull. civ. n 109; See also Bech-Bruun, Lexidale Study (2013), pp. 438–439. 113 C. com., Article L. 236, paragraph 2. But some authors question the applicability of this provision—and the obligation to establish a pre-merger certificate—for an internal merger involving simplified limited liability companies (société par actions simplifiée) and limited stock partnerships (société en commandite par actions) (See Barbieri J-J (2015), Revue Lamy de droit des affaires, 10 and Dondero B (2015) JCP E. 1092).

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Scrutiny of the Legality

However additional formalities have been imposed, by the Directive, on cross-border merging companies.114 Under the terms of Article 11, paragraph 1, of the Directive, each Member State shall designate the court, notary or other authority competent to scrutinize the legality of the cross-border merger regarding part of the procedure which 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. Thus, according to Article L. 236-30 of the French Commercial code, the clerk of the Commercial Court in whose jurisdiction the company resulting for the cross-border merger is registered, or a notary, controls the legality of the merger. He or she has to issue a “certificate of conformity” of the acts and formalities prior to the merger, within 8 days from the filing of the “declaration of conformity”. The clerk or the notary does a formal check. For this purpose, each company must provide a file containing the draft merger, the articles of association of the company resulting from the merger, a copy of the “declaration of conformity” not older than six months, a copy of the minutes of the shareholders’ and bondholders’ meetings and a document certifying that the merging companies have approved the merger in the same terms and that employee participation has been determined pursuant to the Labor Code115 to the clerk or the notary. Unlike the formation by merger of a European company, these formalities could be accomplished by the clerk of the commercial court, whereas the scrutiny of the legality of the SE is performed exclusively by the notary.116 The scrutiny of the legality is an important step because it determines the date when the cross-border merger takes effect. Furthermore, the nullity of the merger could not be pronounced after this date. The Cross-border mergers directive intends to secure the operation. Its provisions are much more restrictive than the Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company which provides that the absence of scrutiny of the legality of the merger may be included on the grounds for winding-up the SE.117

4.3 4.3.1

Entry into Effect Effective Date of the Merger

It is inconceivable that a cross-border merger could take effect at a certain date for one company and at a different date for another one, depending on the law applicable

114

See Bech-Bruun, Lexidale Study (2013), pp. 439–440; European Parliament (2016a, b), p. 25. I.e. Title VII of the Book III of the Part. 2 of the Labor Code. 116 See Baffoy (2008), p. 4; Rajot (2009), p. 2. 117 See also C. com., Article L. 229-3. - II. 115

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to each merging company.118 Neither the method of the cumulative application of the laws involved, nor that of the distributive application is an optimal and feasible option. There can be only one effective date of the merger for all merging companies. Therefore, Article 12 of the directive provides for a conflict of law rule and a substantive rule.119 The conflict of law rule refers to the law which governs the company resulting from the merger. Thus, according to Article 12 above mentioned, the merger takes effect on the date provided by the law applicable to the said company. French law does not literally reproduce this provision. But, Article 12 adds a material rule stating that the effective date of the merger must be after scrutiny of the legality has been carried out. The material rule was and still is today proving difficult to implement into French law. At first, Article L. 236-31 of the commercial code concerns cross-border mergers by creation of a new entity and refers to Article L. 236-4 relating to internal mergers. The latter provides that, if a new company is created by a merger, the merger enters into effect when the company is incorporated to the Company Register. Therefore, in case of the formation of a new company, the effective date of the cross-border merger is the date of registration in the Company Register. This is not difficult because scrutinizing the legality will occur before registration.120 French Law prescribes that the merger by creation of a new company will not take effect before the date of registration of the new company, and will occur after the two steps control of compliance and legality. The reference to the law which governs the new entity—the French law—is then sufficient to determine the effective date of the merger and this solution is to conform with the prescriptions of the directive and the substantial rule edicted by the directive. But, in case of a cross-border merger by absorption, the simple reference to the solution set out in Article L. 236-4 of the commercial code contradicts the substantive rule prescribed by the directive. This Article says that, if the draft merger does not contain a clause specifying the effective date of the merger, the merger takes effect at the date of the general meeting of the company which ultimately approves the merger. Thus, on the basis of the Article, the effective date of a cross-border merger could have occurred before the scrutiny of legality by the clerk of the commercial court or the notary which ascertains that the draft merger has been regularly approved on the same terms by all the merging companies. This is why Article L. 236-31 specifies that a cross-border merger by absorption enters into effect as provided in the merger draft, but this date cannot be fixed before the scrutiny of the legality. Article L. 236-31 indicates also that the effective date must not be determined after the end of the fiscal year of the acquiring company, during which such scrutiny has occurred. By this way, the French legislator takes into account the

118 Le Nabasque (2008), p. 493; Kalaani (2017), p. 438; See Bech-Bruun, Lexidale Study (2013), p. 440. 119 Le Nabasque (2008), p. 493. 120 Kalaani (2017), pp. 439–441.

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“ratchet effect” which consists of carrying out the merger before the end of the fiscal year.121 In practice, there is a necessity to carry out the merger operation before the end of the fiscal year, because drawing up the accounts during the interim period could question the financial adequacy of the share exchange ratio. However, the requirements of Article L. 236-31 present several disadvantages. The first one is that the effective date of the cross-border merger will not depend on an objective fact, known to third parties and identical for all the merger operations, but on a clause of the merger draft, called the “retroactive effect clause” (“clauses d’effet différé” ou “clause d’effet rétroactif”).122 This solution introduced by the Act n 2008-649 of 3 July 2008 was an innovation under French Law, because until then this clause could not determine the effective date of the merger but only its tax and accounting implications by allowing the company to fix the share exchange ratio at a moment close to the end of the fiscal year. Furthermore, the scrutiny of the legality of the cross-border merger could go beyond the end of the fiscal year. Unlike France, several EU Members do not provide for deadlines for the scrutiny of the legality of the merger. According to Article R. 236-20, the clerk of the commercial court or the notary must scrutinize the legality of the merger within 15 days. The mission of the clerk or the notary could be complicated by the delay in receiving the adequate documentation from the authority of other EU members. In an internal merger the non-observance of the date of the end of the fiscal year is not a problem, because the effective date of the merger is the date of the latest general meeting of the merging companies. On the contrary, the prescriptions edicted by Article L. 236-31 can lead to legal uncertainty: acts passed by the absorbed company could appear to be eventually passed after its dissolution. They complicate the determination of the effective date of the merger and results in the extension of the timescale: in practice, one month is wasted if the merging companies want to secure the operation.123 In conclusion, the French legislator has misunderstood the purpose of the effective date of the merger and that of the retroactive effect clause. A modification of the law would be useful and has been requested by numerous authors and practitioners for a long time. What is more, this kind of clause is not very well known by the other EU Member States.

4.3.2

Tax and Accounting Effective Date

Lastly, one problem remains with tax and accounting retroactivity. The Directive mistakes the effective date of the cross-border merger and the tax and accounting effective date of the cross-border merger. Several EU member States, Belgium and Germany for instance, provide that the tax and accounting effective date could be

121

Kalaani (2017), pp. 440–441. Le Nabasque (2008), p. 493. 123 Ibid. 122

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fixed prior to the effective date of the merger.124 However, these countries have determined a deadline. In France, the retroactivity of the tax and accounting effective date is permitted, but there is no deadline. A cumulative application of national provisions implies the respect of the most restrictive one. In case of a merger between a French and Polish company, it is forbidden to set up a tax and accounting retroactivity because Polish Law prohibits this measure.

4.4

Registration

Pursuant to Article 13 of the cross-border mergers Directive, the French clerk of the commercial court where the company is registered notifies the date of effect of the cross-border merger to the registry—or the competent authority—of each company involved in the operation.125 Conversely, the clerk of the Commercial Court must de-register the French absorbed company, upon receipt of the notification from the foreign authority of the effective date of the merger. In the past, companies and practitioners frequently complained about delays, uncertainties and additional costs due to varying documentation requirements, the need for translations and communication problems. For instance, in France, corporate documents that are filed to the Company Register must be accompanied by a French translation, which is the binding version.126 One way to solve the language problem would be to require all documentation and communication relating to cross-border mergers to be in one single language, for instance English. This solution was brought forward in the 2016 Report on cross-border mergers to the European Parliament Committee on Legal Affairs (Juri).127 However, given the political sensitivity of language issues, this may not be easily feasible. Another way to facilitate communication and documentation would be the adoption of standard and electronic forms. A significant improvement has been achieved since July 2017 with the setting up of the new “Business Registers Interconnection System” (BRIS).128 124

Kalaani (2017), p. 442. C. com., Art. R. 123-74-1; See Bech-Bruun, Lexidale Study (2013), p. 440. 126 C. Com., Art. R. 123-20-1 and L. 236-9; See Bech-Bruun, Lexidale Study (2013), p. 444; Cardi et al. (2017), p. 16. 127 European Parliament (2016a, b), p. 24. 128 BRIS is based on legal obligations set out by the Directive 2012/17/EU of 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and companies registers, and by the Implementing Regulation (EU) 2015/884 of 8 June 2015 establishing technical specifications and procedures required for the system of interconnection of registers established by Directive 2009/101/EC of the European Parliament and of the Council. The directive has required the establishment of an information system that interconnects the central, commercial and companies registers of all Member States, whereas the Regulation details the technical specifications for the system. In particular, Article 13(2) of the cross-border mergers Directive, modified by the Directive 2012/17/EU of 13 June 2012, requires that the register of the 125

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Consequences of the Cross-Border Merger

The rules are the same in a domestic merger and in a cross-border merger. According to Article L. 236-3 of the French Commercial code, the shareholders of the absorbed company become shareholders of the surviving company; the absorbed company is wound up without liquidation; all the assets, rights, obligations, and liabilities of the companies being absorbed are transferred to the surviving company.129 This transfer may be restricted (or even excluded) for instance if the asset or liability is of a personal nature (such as a permit or license), or if the transferability has been excluded or limited by statute, contract or nature (for example, an agreement including an “intuitu personae” clause130 or a loan agreement containing an acceleration clause in case of a merger.131 Besides, the completion of some special formalities are required from the merging companies before the transfer of certain assets, rights, and obligations in order to make them enforceable against thirdparties. In accordance with Article L. 1224-1 of the French Labor Code, employment agreements are automatically transferred to the surviving company.

5 Tax Law Overview: Implication of the Euro Park Service Case France has implemented the anti-abuse provision of the Merger Directive. Under the terms of Article 210 C, paragraph 2, of the French Tax Code: a taxpayer must obtain the prior approval of the French tax authorities to obtain the benefits of the directive. Where a merger involves a foreign legal entity, the French taxpayer must demonstrate that: (i) the transaction can be justified on economic grounds; (ii) it does not have as its principal objective tax avoidance or evasion; and (iii) the terms of the transaction make it possible for the capital gains deferred for tax purposes to be taxed in the future. In contrast, tax deferral is granted in a purely domestic merger, without the taxpayer having to meet the above requirements. On 8 March 2017, the Court of Justice of the European Union issued its decision in the Euro Park Service Case in

company resulting from the cross-border merger to notify the registers of the other participating companies without delay via BRIS once the merger has taken effect (and those registers to delete— where appropriate—the old registration upon receipt of that notification). These provision figure in Article R. 123-20-1 of the French Commercial Code. 129 In French, this “universal transfer of assets and liabilities” is named “transmission universelle du patrimoine”. 130 Cass. Civ. 3, 10 November 1998, Bull. civ. III, n 212; Cass. Com. 3 juin 2008, Bull. civ. Iv, n 111; Cass. Civ. 3, 29 February 2012. Bull. civ. III, n 34; See also Dubertret (2006), p. 721. 131 Cardi et al. (2017), p. 26.

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the Euro Park Service Case,132 concluding that France’s domestic rules relating to the anti-avoidance provision in the Merger directive are contrary to the directive and the freedom of establishment provision of the Treaty on the Functioning of the European Union (TFEU). France was obliged to modify its legislation133: Article 23. - V of the Amending Finance Law for 2017 of 28 December 2017 removed the prior approval of the tax authorities.134 Thus, this decision of the Court of Justice should further reduce obstacles to EU Cross-border corporate restructuring.

6 Towards a Cross-Border Mobility Directive To conclude, the overall impact of the Cross-border mergers Directive has been very positive. The Directive has established a clear, predictable and structured framework, increasing legal certainty, which is essential for complex transactions and has reduced the transaction costs.135 The directive has resolved some of the difficulties concerning conflict of law, enhanced protection for creditors and minority shareholders, achieved a compromise with regard to the protection of employees. However, legal obstacles still remain. A first significant drawback is the limitation of the scope of the CBMD to limited liability companies. Only Cross-border mergers of limited liability companies have been harmonised by the Directive. Currently, there is no specific legal framework for cross-border mergers of other legal entities within the meaning of Article 54 of the TFEU. However, the limitation to limited liability companies obviously conflicts with the fact that all legal entities enjoy freedom of establishment, and hence—pursuant to the Sevic judgment136—‘freedom to merge’. The scope of the Revised CBMD should be extended to all legal entities within the meaning of Article 54 TFEU. The other main concerns are under-harmonization of rules, specially concerning stakeholder protection, and the lack of certain fast track procedures.137 Moreover, there is no specific legal EU framework for cross-border divisions138 (in French “scissions”), they are only specifically regulated for European Companies (SEs) and European Cooperative Companies (SCEs). Many Member States, like France, do have rules on national divisions139; some Member States have even

132

CJEU, March 8, 2017, C-14/16, Euro Park Service. Gautier and Hôo (2018), p. 1; Fouquet (2017), p. 733. 133 Conseil d’État (CE), June 26, 2017, n 363911, Europark Service. 134 Loi n 2017-1775 du 28 décembre 2017 de finances rectificative pour 2017. 135 European Parliament (2016a, b), p. 21. 136 CJEU, Grand Chamber, 13 December 2005, aff. C-411/03, Sevic System AG, op. cit. 137 European Parliament (2016a, b), p. 1. 138 European Parliament (2016a, b), p. 26; See also European Parliament (2017), pp. 9–11. 139 C. com., Art. L. 236-1 to L. 236-24.

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adopted special rules for cross-border divisions.140 In practice, cross-border divisions are an important tool for cross-border reorganisations. The right to carry out a cross-border division (the “freedom to divide”) is protected as an inherent aspect of the freedom of establishment, enshrined in the Treaty since 1957. But, without a secure EU legal framework, this ‘freedom to divide’ is largely an illusion. There have been concerns that cross-border divisions may be abused to selectively divide assets and liabilities to the detriment of creditors and employees. For the moment, cross-border divisions are generally implemented in two stages: an initial domestic division and a subsequent cross-border merger.141 There is also a real need for a special EU legal framework on “cross-border transfers of company seat” or “crossborder conversions” (in French “transfert de siège social”).142 For some years now, these issues have been on the EU agenda. In 2014 the European Commission has launched a public consultation about the existing barriers to cross-border operations and about the amendments that needed to be made to existing legislation.143 The European Commission wants to reform the Cross-border mergers Directive and to adopt a single Cross-border Mobility Directive encompassing reformed rules on cross-border mergers and new rules on crossborder divisions and conversions. On the 13 June 2017, the European Parliament adopted a resolution on cross-border mergers and divisions144 and called on the European Commission to propose new rules on cross-border mobility in order to enhance internal market and to foster employee rights. The text proposal should have been published by the European Commission at the beginning of this year. This delay clearly shows that the adoption of harmonized rules in these areas is not an easy task.

References Baffoy G (2008) La mission impartie au notaire dans le contrôle de la légalité des fusions transfrontalières. La revue fiscale du patrimoine lexinexis, vol n 9, étude 14 Barrière F (2013) La fusion-filialisation. Revue des sociétés Dalloz: 667 Bech-Bruun, Lexidale (2013) Study on the application of the cross-border mergers directive. Transposition of the cross-border mergers directive into French law, pp 424–445 Beguin J (2001) La difficile harmonisation du droit des fusions transfrontalières. Mélanges Ch. Gavalda, Dalloz, p 19

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This is the case in Denmark and Finland (European Parliament 2016a, b, p. 27). European Parliament (2017), pp. 1–13. 142 European Parliament (2016a, b), p. 32. 143 European Parliament (2017), pp. 1–13; European Parliament (2016a, b), pp. 1–70; Lecourt (2014), p. 135. 144 European Parliament resolution of 13 June 2017 on cross-border mergers and divisions, P8 TA (2017)0248. 141

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Cardi B, Burman B, Alogna FG, Gautier L, Catoir D (2017) Cross-border mergers into and out of France: 1–32. http://xbma.org/forum/wp-content/uploads/2017/04/cross-border-mergers-intoand-out-of-france.pdf. Accessed 15 Apr 2018 Cathiard C (2008) Le régime des fusions transfrontalières depuis la loi du 3 juillet 2008. Revue droit des sociétés – Lexisnexis, 10, étude 8 Cathiard C, Poirier A-S (2017) Fusions transfrontalières. Répertoire de droit des sociétés, Dalloz Chacornac J (2016) La protection des créanciers de la société absorbée à l’issue d’une fusion internationale. Recueil Dalloz: 1404 Conac P-H et al (2011) Les fusions transfrontalières de sociétés. Droit luxembourgeois et droit comparé, Larcier Desaché J-M (2011) France. In: Van Gerven D (ed) Cross-border mergers in Europe, vol 2. Cambridge University Press, pp 14–28 Dubertret M (2006) L’intuitu personae dans les fusions. Revue des sociétés Dalloz: 721 Ducouloux-Favard C (1990) La réforme française des fusions et l’harmonisation des législations européennes. Recueil Dalloz: 212 European Parliament (2016a) Ex-post analysis of the EU framework in the area of cross-border mergers and divisions. European parliament assessment. Study by S Reynolds and A Scherrer (European Parliamentary Research Service). PE 593.796: 1–70 European Parliament (2016b) Cross-border mergers and divisions, transfer of seat: is there a need to legislate?, Study for the Juri Committee. Workshop for on the future of European Company Law, PE 556.960: 1–47 European Parliament (2017) Report on cross-border mergers and divisions (2016-2065(INI). Committee on Legal Affairs, by E. Gasbarra, a8-0190/2017: 1–13 Fouquet O (2017) Droit des fusions transfrontalières européennes: le législateur français a mal interprété le droit dérivé et le droit primaire de l’Union (CE 26 juin 2017, n 363911, Europark service). Revue trimestrielle de droit commercial Dalloz: 733 Gautier M, Hôo M-P (2018) Que reste-t-il des agréments restructuration au 1er janvier 2018. Revue droit fiscal - Lexisnexis 2(11):1 Guengant A (2008) Fusions transfrontalières: transpositions de la directive 2005/56/ce du 26 octobre 2005. Loi n 2008-649 du 3 juillet 2008. La semaine juridique entreprise et affaires (JCP E): 2000 Herrmann A, Provost B (2011) Les difficultés pratiques d’ordre juridique et fiscal des opérations de fusions transfrontalières. Cahier de droit de l’entreprise lexisnexis n 6, dossier 38 Institut français des administrateurs and ethics & boards (2017) SBF 120. Baromètre iIFA - Ethics & Boards de la composition des conseils: 1 Kalaani A (2017) La fusion des sociétés commerciales en droit interne et international. Contribution à la notion de «contrat-organisation». L’Harmattan: 1–630 Larcena A, Colly-Chenard E (2013) Fusion transfrontalière simplifiée et allégement des formalités légales de fusion. Une lecture croisée. Le cas d’une société commerciale française absorbée. Revue droit des sociétés, 4, étude 8 Le Nabasque H (2008) Les fusions transfrontalières après la loi n 2008-649 du 3 juillet 2008. Revue des sociétés Dalloz: 493 Le Nabasque H (2013) Les fusions et les scissions transfrontalières. Revue des sociétés Dalloz: 412 Lecourt B (2005) Adoption de la directive sur les fusions transcommunautaires. Revue des sociétés Dalloz: 923 Lecourt B (2014) Fusions transfrontalières: rapport sur l’application de la directive. Revue des sociétés Dalloz: 135 Lencou D, Menjucq M (2009) Les fusions transfrontalières de sociétés de capitaux: enfin une réalité mais des difficultés persistantes !, Recueil Dalloz: 886 Luby M (2006) Impromptu sur la directive n 2005-56 sur les fusions transfrontalières des sociétés de capitaux. Revue droit des sociétés, 6, étude 11 Martin D (2011) Études comparatives des différentes modalités de rapprochements transfrontaliers, cahier du droit de l’entreprise Lexisnexis: 45

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Mastrullo T (2009) La transposition en droit français de la directive sur les fusions transfrontalières: une avancée et des regrets. Revue Europe, étude 8 Notat N, Senard J-D (2018) L’entreprise, objet d’intérêt collectif, Rapport aux ministres de la transition écologique et solidaire, de la justice, de l’économie et des finances, du travail Papadopoulos T (2011) EU regulatory approaches to cross-border mergers: exercising the right of establishment. Eur Law Rev:36 Rajot B (2009) Fusions transfrontalières: rôle du notaire. Revue responsabilité civile et assurances Lexisnexis, 1, alerte 2 Sénat (2008) Rapport fait au nom de la commission des lois constitutionnelles, de législation, du suffrage universel, du règlement et d’administration générale sur le projet de loi, adopté par l’assemblée nationale après déclaration d’urgence, portant diverses dispositions d’adaptation du droit des sociétés au droit communautaire, par M. Jacques Gautier, Sénateur, 348: 48

Bénédicte François is a Professor of Law in the Faculty of Law at Paris XII University (France). She is the Secretary General of the “Revue des sociétés” (the French Corporate Law Review) (Dalloz publisher). She is a Doctor of Law from Paris II University. She passed the Paris Bar exam. Her research areas deal principally with Company Law, Corporate governance, Financial Law. From 2012 to 2016, she was a Professor at the University of Tours (France) and a Lecturer at Paris II University. She was the Associate Director of the Human and Social Sciences Doctoral School (University of Tours).

The Implementation of the Cross-Border Mergers Directive (2005/56/EC) in Germany: A Story of Insufficiencies and (Better) Alternatives Sebastian Mock

1 Introduction By implementing the 10th European company law directive (Cross-Border Mergers Directive [2005/56/EC]) in 2007 German merger law provided for the first time a regulation for cross-border mergers of corporations. However, since the German lawmaker followed the limited scope of application of the directive (to corporations), provided a rather broad and extensive protection of minority shareholders and failed to properly implement the rules on creditor protection the impact of the German regulations are rather limited. Due to these insufficiencies, cross-border mergers take hardly place in Germany. Moreover, the framework provided by the Sevic-1 case of the European Court of Justice provides a (better) possibility for a cross-border change of (corporate) form as an alternative tool for cross-border mergers. This paper examines these German regulations on cross-border mergers, shows the insufficiencies in the current law and examines the framework for alternative strategies.

As far as reference is made to the German Stock Corporation Act (Aktiengesetz [AktG]), the Closed Corporation Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung [GmbHG]) and the Transformation Act (Umwandlungsgesetz [UmwG]) this country report is based on the official translations provided by the German Federal Ministry of Justice (available under www. gesetze-im-internet.de/Teilliste_translations.html). 1

ECJ as of 13.12.2005 – C-411/03 (SEVIC Systems AG), ECR I-10805.

S. Mock (*) Vienna University of Economics and Business, Vienna, Austria e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_16

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2 A Short History of the Law on Mergers in Germany The German law on mergers has its origins in the stock corporation law since it was originally only addressed in the stock corporation law (Aktiengesetz [AktG]) and the law on closed corporations (Gesetz betreffend die Gesellschaften mit beschränkter Haftung [GmbHG]).2 Only later a specific law on mergers (Umwandlungsgesetz) was adopted which however was limited in its scope of application. Consequently, German company law was characterized by an endless debate on the analogous application of these several provisions to other forms of companies and forms of mergers. Only in 1995, the German legislator undertook a major reform and created the (new) law on mergers (Transformation Act [Umwandlungsgesetz]) as a comprehensive codification dealing with all aspects of merger law. This Transformation Act applies a classical codification approach by being divided in several books starting with a general part (1st book—§ 1). The following five books deal with mergers (Verschmelzung—§§ 2-122l), divisions (Spaltung—§§ 123-173), transfers of all assets of a company (Vermögensübertragung—§§ 174-189), change of the form of company (Formwechsel—§§ 190-312) and with criminal sanctions and fines (§§ 313-316). Finally, the 6th book deals with transitional provisions. Although each form of merger is governed by a single book all provisions address the protection of creditors (Gläubigerschutz), the protection of investors/shareholders (Anteilseignerschutz) and the protection of workers (Arbeitnehmerschutz) which therefore can be described as the major issues of the German law on mergers. Despite the fact that the German law on mergers provides a comprehensive and detailed regulation on mergers and related aspects in the last decade a non-codified merger law developed being applied in addition to the codified merger law. This development is based in the mobility of companies in the common market being established by the European Court of Justice in its case law on the freedom of establishment (Art. 49, 54 TEUF).3

3 Implementation of the Cross-Border Mergers Directive in Germany The Cross-Border Mergers Directive (2005/56/EC) was adopted in Germany in 20074 by creating a new subchapter in the 2nd book in the German Transformation Act (10th chapter [§§ 122a-122l]—Cross border mergers of corporations [Grenzüberschreitende Verschmelzung von Kapitalgesellschaften]). However, 2

For a historical overview see Stengel in: Semler and Stengel (2017), Einleitung A note 6 ff. with further references. 3 See Sect. 4 for further details. 4 Zweites Gesetz zur Änderung des Umwandlungsgesetzes as of 19.4.2007, Federal Gazette as of 24.4.2007, p. 542 ff.

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these rules are hardly applied in legal practice (see Sect. 3.5). The reasons for the limited application of this codified cross-border law in Germany are its limited scope of application (Sect. 3.1), the (extensive) protection of minority shareholders (Sect. 3.2) and the (improper) Rules on creditor protection (Sect. 3.3).

3.1

(Limited) Scope of Application

By implementing the Cross-Border Mergers Directive (2005/56/EC), the German legislator followed a rather strict 1:1 approach by basing the new rules on crossborder mergers only on the provisions provided by the Cross-Border Mergers Directive (2005/56/EC). As a consequence, these provisions apply only—from a German perspective—to corporations (the stock corporation [Aktiengesellschaft], the limited joint-stock corporation [Kommanditgesellschaft auf Aktien] and the closed corporation [Gesellschaft mit beschränkter Haftung]) excluding all other forms of companies (§ 122b subs. 1 German Transformation Act). The German legislator explicitly limited the scope of application to corporations by stating that a general application to all forms of companies was not required by European law and would be almost impossible since its regulation would have to deal with a countless number of scenarios involving companies from all other Member States.5 Nevertheless, legal scholars6 demanded the introduction of a general application to all forms of companies since also the general merger law is not limited to certain forms of companies. Therefore, especially partnerships and associations cannot be involved in a cross-border merger. In this regard, it has to be noted that partnerships are still a rather important form of business entity in Germany. This is especially the case for the so-called GmbH & Co. KG where a closed corporation (Gesellschaft mit beschränkter Haftung) is the (only) partner of a partnership with an unlimited liability. This form of company is still the dominating form for small and medium sized businesses in Germany. In addition, the German provisions on cross-border mergers do not apply to the European Company (Societas Europaea) apart from the fact that it was founded in Germany or another Member State. However, it has to be noted that the SE-Regulation (EC/2157/2001) provides an own set of rules dealing with crossborder mergers which are in this regard considered as lex specialis.7 Finally, the German provisions on cross-border mergers cannot be applied to foreign corporations, which are governed by the respective foreign corporate law. This is also the case if a foreign and a German corporation participate in a cross-border merger

5

See Legislative Explanatory Statement, BR-Drucks. 548/06, p. 20. See especially Bayer and Schmidt (2006a), p. 841; Drinhausen and Keinath (2006), p. 732; Forsthoff (2006), p. 618; but see also Müller (2006), p. 290 favouring a limitation to corporations. 7 Drinhausen in: Semler and Stengel (2017), § 122b note 5; Drygala and von Bressendorf (2016), p. 1162. 6

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because the German provisions (§§ 122a ff. German Transformation Act) apply only to the German corporation while the participation of the foreign corporation in the cross-border merger is governed by the respective foreign (cross-border merger) law.8 The limited scope of application applies also in the case of foreign corporations with real seat in Germany. Because still a significant number of German business entities are still organized as English corporations (especially the Private company limited by shares [so-called Limited]) the limited scope of application constitutes a major problem for these business entities in dealing with the BREXIT since after the BREXIT under German law the real seat theory will probably9 apply to these English corporations. Finally, the §§ 122a ff. German Transformation Act apply generally to all kind of inbound and outbound mergers. Therefore, these provisions apply also if only the newly formed company is a foreign company although this case is not required by the Cross-Border Mergers Directive (2005/56/EC).10 Besides, this distinction is relevant regarding the scope of application of some to these provisions since some of them apply only to an inbound or an outbound merger.11

3.2

(Extensive) Protection of Minority Shareholders

Furthermore, the German legislator established a rather strict regime for the protection of minority shareholders. In this regard, the German law distinguishes between an ex-ante- (see Sect. 3.2.1) and an ex-post-protection (see Sect. 3.2.2) of minority shareholders.

3.2.1

Ex-ante Protection by Appraisal Right

The ex-ante protection of the minority shareholder is provided by an appraisal right being based on a fair price. However, this appraisal right with a compensation in cash exists only in the case of an outbound merger (§ 122i German Transformation Act). In the case of an inbound merger the general principles of German merger law apply corporation according to which shares of the new corporation must be offered to all shareholders (§ 122c subs. 2 no. 2 German Transformation Act). Nevertheless, 8 Bayer in: Lutter (2014), § 122a note 16; Drinhausen and Keinath (2006), p. 726; Drygala and von Bressendorf (2016), p. 1162. 9 Since the conditions of a BREXIT are not settled yet it remains unclear how the German law will deal with these English corporations. However, it is already generally accepted that the managers of these corporations have to deal with alternative szenarios (see for this discussion Schall (2016), p. 407). 10 Bayer in: Lutter (2014), § 122a note 24 ff. with further references. 11 This is especially the case for the appraisal right (see Sect. 3.2) and the creditor protection (see Sect. 3.3).

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it remains unclear whether an offer in cash rather than in shares is also to be made when the new corporation is listed on a stock exchange since then the shareholders can easily realize the cash value of the (new) shares by selling them after the merger.12 The major problem of this appraisal right is that so far German law does not provide a detailed regulation on how to determine the fair price. Also in the existing case law, no specific valuation method is generally accepted. In fact, the Federal Court of Justice just recently refused to commit to a specific valuation method but stated that different methods must be applied under different circumstances.13

3.2.2

Ex-post Protection by Limited Review of the Shareholder Resolution

Moreover, the shareholders can challenge the fair price offered by the corporation being acquired in a specific procedure (so-called Spruchverfahren) solely dealing with determination of the fair price or the exchange ratio of the shares (§ 122h German Transformation Act). In this procedure the appraisal right of the shareholders (in an outbound merger) or the exchange ratio of the shares (in an inbound merger) can only be improved but not impaired therefore limiting the risk for the shareholders initiating this procedure to the costs of their own legal representatives. In addition, the decision of the court in this procedure has an inter omnes effect improving the fair price for all shareholders including those who did not initiate this procedure. Since the shareholders are provided with a specific procedure for the determination of the fair price or the exchange ratio of the shares they cannot challenge the shareholders’ resolution approving the cross-border merger (§ 14 German Transformation Act). This rule applies even if the price offered by the corporation being acquired is excessively too low. However, this limitation to challenge the shareholders resolution applies only if the foreign law also provides a similar procedure to guarantee the determination of a fair price or the exchange ratio of the shares or that the foreign corporation voluntarily agrees to provide such a procedure (§ 122h subs. 1 German Transformation Act). Because such a procedure hardly exists outside of Germany the (minority) shareholders can usually challenge the shareholders resolutions providing them with an enormous potential for extortion since it usually takes several years before the courts (in all instances) finally decide on this matter. Until such a final judgment is rendered the commercial register cannot register the merger (so-called Registersperre). In order to enforce this rule the representatives of the

12 In favour of an unconditional cash offer Polley in: Henssler and Strohn (2014), § 122i note 2; Schmitt et al. (2016), § 122i note 5; dissenting Bayer and Schmidt (2006a), p. 844; Vetter (2006), p. 623. 13 BGH v. 29.9.2015 – II ZB 23/14, NZG 2016, 139 ¼ AG 2016, 135; for a detailled discussion see Mock (2016), p. 1261 ff.

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corporations have to make a statement to the commercial register that no pending law suits challenging the shareholders resolution exist (§ 16 German Transformation Act).

3.2.3

Criticism and Call for Reform

The existing system for the protection of minority shareholders is generally considered as being obsolete and impractical.14 This is especially the case since a potential challenging of the shareholders’ resolution approving the cross-border merger can usually not be excluded. However, such an exclusion is essential for the success of cross-border merger. Moreover, the existing special procedure to review the fair price or the exchange ratio of the shares (Spruchverfahren) provides an excessive incentive for the shareholders to initiate it since they cannot lose but only improve their positions. This lead to a growing opposition to this rule among German scholars calling for a reform.15 Consequently, cross-border mergers are usually limited to mergers with a group of companies not involving (outside) minority shareholders.16

3.3

(Improper) Rules on Creditor Protection

Regarding the protection of creditors, the German law on cross-border mergers provides a stricter regime, which is not even—in contrast to the requirements set out by Art. 4 subs. 1 b), sub. 2 Cross-Border Mergers Directive (2005/56/EC)—the regular system of creditor protection of a national merger but a specific rule on crossborder mergers. Pursuant to § 122j German Transformation Act creditors have—in the case of an outbound merger—the right to demand a security (e.g. guarantee from a bank) if they notify the corporation within 2 months after the publication of the merger plan and if their claims are endangered by the merger. Such an endangerment of the claim is generally assumed if the other (foreign) corporation being involved in the merger has a big loss in the annual accounts or the enforcement of the claim takes longer after the merger since then due to a change in international jurisdiction new procedural rules apply.17 If the creditors demand such a security the members of the representative body must affirm that these creditors have been provided such security in an appropriate measure (§ 122k subs. 1 sent. 3 German Transformation Act). These provisions are rather strict especially in comparison with the rules being applicable to a mere national merger since in such a case the creditors can claim the

14 Drygala and von Bressendorf (2016), p. 1162; Bayer in: Lutter (2014), § 122h note 4; Bayer and Schmidt (2006b), p. 404. 15 See e.g. Bayer in: Lutter (2014), § 122h note 4. 16 Drygala and von Bressendorf (2016), p. 1163. 17 Drygala and von Bressendorf (2016), p. 1163; Polley in: Henssler and Strohn (2014), § 122j note 8.

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same but only after the merger (ex post protection). However, some legal scholars claim that such a different treatment of cross-border and mere national mergers is covered by Art. 4 subs. 2 sent. 1 Cross-Border Mergers Directive (2005/56/EC) stating that the national law should take into account the cross-border nature of the merger.18 However, it is generally doubted that ex ante system of creditor protection in § 122j German Transformation Act can be justified.19 While these issues were heavily debated after the implementation of the Cross-Border Mergers Directive (2005/56/EC) into German law, this debate now has to be considered as basically being over20 since the decision of the European Court of Justice in the case KA Finanz/Sparkassen Versicherung.21 Now it is generally accepted that the application of § 122j German Transformation Act constitutes a violation of European law.

3.4

Employee Participation

The rules of employee participation as provided by Art. 16 Cross-Border Mergers Directive (2005/56/EC) were implemented in the law on the employee participation in cross-border mergers (Mitbestimmungsgesetz bei einer grenzüberschreitenden Verschmelzung). If the newly formed corporation is listed on a stock exchange or the (general) German rules on employee participation apply also the gender quota must be applied. Therefore, at least 30% of the members of the supervisory board must be men or women (§ 96 subs. 3 German Stock Corporation Act22). However, this rule applies only if the composition of supervisory board was formed in accordance with the legal provisions and not by an agreement between the board and the employees. Consequently, this agreement can completely waive the gender quota or contain a different quota.23 In contrast to the regime on the protection of minority shareholders and on the protection of creditors, this rule creates some flexibility in cross-border mergers.

18

Krause and Kulpa (2007), p. 75; Müller (2006), p. 289; Passarge and Stark (2007), p. 803 ff. Bayer and Schmidt (2006b), p. 405; Drygala and von Bressendorf (2016), p. 1163. 20 Bayer in: Lutter (2014) § 122j note 6; Beutel (2008), p. 260; Drinhausen and Keinath (2006), p. 731. 21 ECJ as of 7.4.2016 – C-483/14 (KA Finanz/Sparkassen Versicherung), ECR I-205. 22 § 96 subs. 3 German Stock Corporation Act states: 19

In case of listed companies which resulted from a cross-border merger and whose supervisory or management bodies according to the Act on the co-determination of employees shall, in case of a cross-border merger, comprise an equal number of shareholders’ and employee representatives, the respective supervisory or management body shall comprise at least 30 per cent of both women and men. 2(2) sentences 2, 4, 6 and 7 shall apply accordingly. 23

Drygala and von Bressendorf (2016), p. 1163 f.; Teichmann and Rüb (2015), p. 266.

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The Limited Impact of the Codified Cross-Border Merger Law on Legal Practice

Although the §§ 122a ff. German Transformation Act were enacted more than 10 years ago so far there is only a very limited number of reported cases of crossborder mergers. In the period between 2007 and 2012, only 381 cross-border mergers (134 outbound mergers and 247 inbound mergers) were reported.24 This rather small number of cross-border mergers involving German corporations is also documented by the fact that so far almost no case law exists dealing with the §§ 122a ff. German Transformation Act. The major reasons for this reluctance are the legal uncertainty resulting from the problem of the exclusion of the lawsuit challenging the shareholder resolution of the German corporation and the unclear status of the rules on creditor protection.

4 Application of Non-codified Cross-Border Transformation Law As Alternative Strategy The limited impact of the codified cross-border merger law on legal practice is also a result of a developing non-codified cross-border transformation law in the last decade.

4.1

European Background

This is the case since in Germany some scholars apply a rather broad understanding of the Sevic25 case of the European Court of Justice. According to this interpretation, Sevic generally admits cross-border transformations.26 However, some legal scholars also doubt this understanding since it questions the decisions of the European Court of Justice in Daily Mail,27 Cartesio28 and Vale.29,30 The major 24

See Bayer, Grenzüberschreitende Verschmelzungen im Zeitraum von 2007 bis 2012, https:// www.boeckler.de/pdf/mbf_2013_06_verschmelzungen_bayer.pdf. 25 ECJ as of 13.12.2005 – C-411/03 (SEVIC Systems AG), ECR I-10805. 26 Bayer in: Lutter (2014) § 122a note 12; Drygala and von Bressendorf (2016), p. 1164; Siems (2006), p. 135. 27 ECJ as of 27.9.1988 – 81/87 (The Queen gegen H. M. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc.), ECR I-5483. 28 ECJ as of 16.12.2008 – C-210/06 (CARTESIO Oktató és Szolgáltató bt.), ECR I-9641. 29 ECJ as of 12.7.2012 – C-378/10 (VALE Építési kft), ECR I-440. 30 See Kindler in: Münchener Kommentar zum BGB (2017), Internationales Gesellschaftsrecht note 127, p. 854; Leible and Hoffmann (2006), p. 166; Leuering (2008), p. 75.

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argument in favour of the admissibility of cross-border mergers in this context is that a prohibition of a cross-border merger of a German company would constitute a non-justifiable discrimination of the foreign company (acquiring the German corporation in the merger) since German merger law generally admits (domestic) mergers involving German corporations.31 However, it is still unsettled whether this approach applies in cases where the new corporation has no real business activity in another Member States (requirement of a genuine link).32 This condition or argument has its origin in the debate about the so-called pseudo-foreign corporation and must therefore be generally doubted. Finally, a caveat must be made in this context since so far, no case law of the Federal Court of Justice exists. However, especially due to the recent decision of the European Court of Justice in Polbud33 it must be generally doubted that these kind of restrictions can still be applied.

4.2

Cherry-Picking of the Applicable Law

The idea of the general admissibility of cross-border mergers raises—at least from a continental law point of view—the questions which provisions should be applied in these cases. In this context the existing case law and the opinions of legal scholar provide almost all possible solution reaching from a (simple) analogous application of the provisions on cross-border mergers (§§ 122a ff. German Transformation Act),34 the analogous application of the provisions being applicable in these cases to the European Company (SE-Regulation [EC/2157/2001])35 and the application of application of the principles set out by the Cross-border Merger Directive (2005/56/ EC). Consequently, it seems that almost everything is possible in German non-codified cross-border merger law. However, since the Polbud-decision36 of the European Court of Justice this discussion evolves ever further since now a simple transfer of the statutory seat and therefore an international change of the form of company is possible. This limits the discussion to cross-border merger cases in which companies with real business activity from different Member States are involved.

31

Drygala and von Bressendorf (2016), p. 1164 f. In favour of such a limitation König and Bormann (2012), p. 1242 f.; Wöhlert and Degen (2012), p. 433 f.; dissenting Schmitt et al. (2016), § 1 note 52; Bayer and Schmidt (2012), p. 1486. 33 ECJ as of 25.10.2017 – C-106/16 (Polbud – Wykonawstwo sp. z o.o.), ECR I-804. 34 Drygala in: Lutter (2014), § 1 note 35. 35 Siems (2006), p. 138 f. 36 Siems (2006), p. 138 f. 32

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Advantages and Disadvantages

The application of this non-codified cross-border transformation law provides some advantages but also some disadvantages in comparison to the cross-border merger law of the §§ 122a ff. German Transformation Act. One of the major advantages of the non-codified cross-border merger law is its unlimited scope of application. While the §§ 122a ff. German Transformation Act are limited in their scope of application to corporations37 the non-codified cross-border merger law does not provide such a limitation. Consequently, also partnerships (especially the GmbH & Co. KG) and other forms of companies can be subject to a cross-border merger. In fact, this non-codified cross-border transformation law provides not only the possibility for a cross-border merger but also for a cross-border division of a company38 with is neither addressed by the Cross-Border Mergers Directive (2005/56/EC) not the German codified cross-border transformation law. In addition, the rather strict provisions dealing with the protection of minority shareholders and the protection of creditors do not apply in the non-codified cross-border merger law. However, it must be noted that in the non-codified cross-border merger law there is a rather large legal uncertainty preventing especially legal counsellors to recommend such a crossborder merger. This is especially the case since so far, no decision of the Federal Court of Justice exists.

5 Summary So far, the German law implementing the Cross-Border Mergers Directive (2005/56/ EC) has a rather theoretical scope of application. This limited use of these provisions is attributed to the rather extensive rules on the protection of minority shareholders and the improper rules on creditor protection. Consequently, there is almost no case law on these provisions. In contrast, a basically non-codified merger law developed in the last decade being based on the case law of the European Court of Justice on the Freedom of Establishment (Art. 49, 54 TEUF) providing a more flexible approach. However, even this non-codified regime faces a rather unclear future due to the admissibility of an international change of the form of company in the aftermath of the Polbud-decision39 of the European Court of Justice providing again an alternative for case where the motivation of the cross-border merger is only the change of the corporate form.

37

See Sect. 3.1. Drygala and von Bressendorf (2016), p. 1165. 39 Siems (2006), p. 138 f. 38

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Annex (English Translation of §§ 122a ff. German Transformation Act) Chapter 10 (Cross-Border Merger of Companies Limited by Shares)

Section 122a (Cross-Border Merger) (1) A cross-border merger is a merger in which at least one of the companies involved is subject to the laws of another Member State of the European Union or of another contracting party of the Agreement creating the European Economic Area. (2) Unless otherwise provided for in the present Chapter, the regulations of Part 1 and those of Chapters 2, 3, and 4 of Part 2 shall apply mutatis mutandis to the involvement of a company limited by shares (Section 3 (1) no. 2) in a cross-border merger. Section 122b (Companies Eligible for Mergers) (1) Solely companies limited by shares in the sense of Article 2 no. 1 of the 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 no. L 310 p. 1) may be involved in a cross-border merger as companies being acquired, acquiring companies, or newly formed companies that have been established pursuant to the laws of a Member State of the European Union or of some other contracting party of the Agreement creating the European Economic Area and that have their registered seat as recorded in the by-laws, their central administration, or their principal place of business in a Member State of the European Union or some other contracting party of the Agreement creating the European Economic Area. (2) The following may not be involved in a cross-border merger: (a) cooperative societies, even in the cases where they would fall within the definition laid down in Article 2 no. 1 of the Directive in accordance with the laws of some other Member State of the European Union or some other contracting party of the Agreement creating the European Economic Area; (b) companies the object of which is the collective investment, in keeping with the principle of risk diversification, of capital provided to them by the public, the shares of which companies may be repurchased or redeemed, at the request of the owners of shares, directly or indirectly out of the assets of that company. Actions taken by such a company to ensure that the stock exchange value of its shares does not vary significantly from its net asset value shall be regarded as equivalent to these repurchases or redemptions.

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Section 122c (Draft Terms of Merger) (1) The representative body of a company involved shall prepare, together with the representative bodies of the other companies involved, common draft terms of merger. (2) The draft terms of merger, or their initial outline, must provide the following information at a minimum: (a) the legal form, firm name, and registered seats, respectively, of the company being acquired and the acquiring or newly formed company, (b) the ratio applicable to the exchange of shares in the company and, as the case may be, the amount of the additional cash payments, (c) the details regarding the allotment of the shares in the acquiring or newly formed company, (d) the likely repercussions of the merger on employment by the company, (e) the date from which the shares in the company will entitle their holders to participate in the profits, as well as any special conditions affecting that entitlement, (f) the date from which the actions taken by the companies being acquired will be deemed, for accounting purposes, as having been taken for the account of the acquiring or newly formed company (merger cut-off date), (g) the rights conferred by the acquiring or newly formed company on the shareholders enjoying special privileges and on holders of securities other than shares in the company, or the measures proposed concerning such shareholders and holders of securities, (h) any special advantages granted to the experts auditing the draft terms of merger or the members of the administrative, management, supervisory, or controlling bodies of the companies involved in the merger, (i) the by-laws of the acquiring or newly formed company, (j) as the case may be, information on the procedures by which arrangements are determined for the involvement of employees in the definition of their co-determination rights in the company resulting from the cross-border merger, (k) information on the valuation of the assets and liabilities that are to be transferred to the acquiring or newly formed company, (l) the cut-off date of the balance sheets of the companies involved in the cross-border merger, based on which the terms of the cross-border merger are determined. (3) Where all shares in a company being acquired are held by the acquiring company, the information regarding the exchange of the shares (subsection (2) nos. 2, 3 and 5) shall not be required inasmuch as it concerns the absorption of this company. (4) The draft terms of merger must be recorded by a notary.

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Section 122d (Publication by Notice of the Draft Terms of Mergers) The draft terms of merger, or their initial outline, are to be filed with the register not less than one (1) month prior to the assembly of owners of shares who are to adopt a resolution consenting to the draft terms of merger pursuant to section 13. The court is to provide notification of the following information in the publication by notice pursuant to section 10 of the Commercial Code (HGB), and shall do so without undue delay: 1. an indication as to the draft terms of merger, or their initial outline, having been filed with the commercial register, 2. the legal form, firm name and registered seats of the respective companies involved in the cross-border merger, 3. the registers in which the companies involved in the cross-border merger have been entered, as well as the respective number under which they have been entered, 4. an indication of the arrangements made for the exercise of the rights of creditors and of any minority shareholders of the companies involved in the cross-border merger, along with the address at which full and complete information on those arrangements may be obtained free of charge. The information that is to be published by notice is to be provided to the register when filing the draft terms of merger, or their initial outline. Section 122e (Report on the Cross-Border Merger) The report on the cross-border merger drawn up in accordance with section 8 is to include an explanation of the repercussions that the cross-border merger will have on the creditors and employees of the company involved in the merger. The report on the cross-border merger is to be made available, pursuant to section 63 (1) no. 4, to the owners of shares as well as the works council responsible or, in the event no works council exists, to the employees themselves of the company involved in the cross-border merger; this shall be done not less than one (1) month prior to the assembly of owners of shares who are to adopt a resolution consenting to the draft terms of merger pursuant to section 13. Section 8 (3) shall have no application. Section 122f (Audit of the Cross-Border Merger) The draft terms of merger, or their initial outline, are to be audited in accordance with sections 9 through 12; section 48 shall have no application. The audit report must be made available not less than one (1) month prior to the assembly of owners of shares who are to adopt a resolution consenting to the draft terms of merger pursuant to section 13. Section 122g (Consent by the Owners of Shares) (1) The owners of shares may make their consent pursuant to section 13 contingent on their express ratification of the arrangements made for the co-determination rights of the employees of the acquiring or newly formed company.

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(2) Where all shares in a company being acquired are held by the acquiring company, the owners of shares in the company being acquired need not adopt a merger resolution. Section 122h (Improvement of the Ratio Applicable to the Exchange) (1) If the companies involved in the cross-border merger are governed by the laws of some other Member State of the European Union or some other contracting party of the Agreement creating the European Economic Area and these laws do not provide for a procedure to scrutinise and amend the ratio applicable to the exchange of shares, Section 14 (2) and section 15 shall apply to the owners of shares in a company being acquired only if the owners of shares in the companies involved in the cross-border merger expressly consent, in the merger resolution, to the application of said provisions. (2) Section 15 shall also apply to owners of shares in a company being acquired that is governed by the laws of some other Member State of the European Union or some other contracting party of the Agreement creating the European Economic Area, if the laws of this state provide for a procedure to scrutinise and amend the ratio applicable to the exchange of shares and German courts have international jurisdiction for the implementation of such a procedure. Section 122i (Compensation Offer in the Draft Terms of Merger) (1) Where the acquiring or newly formed company is not governed by German law, the company being acquired is to offer, in the draft terms of merger, or their initial outline, to each owner of shares recording an objection against the merger resolution adopted by the company, to acquire that owner’s shares in return for appropriate cash compensation. The regulations of the Stock Corporation Act (AktG) regarding the acquisition of treasury stock as well as those of the Limited Liability Companies Act (GmbHG) regarding the acquisition of own business shares shall apply mutatis mutandis; however, section 71 (4), second sentence, of the Stock Corporation Act and section 33 (2), third sentence, second half-sentence, first alternative of the Limited Liability Companies Act shall have no application in this regard. Section 29 (1), fourth and fifth sentences, as well as subsection (2) of said section and sections 30, 31, and 33 shall apply mutatis mutandis. (2) If the companies involved in the cross-border merger are governed by the laws of some other Member State of the European Union or some other contracting party of the Agreement creating the European Economic Area and these laws do not provide for a procedure to compensate minority shareholders, Sections 32 and 34 shall apply to the owners of shares in a company being acquired only if the owners of shares in the companies involved in the cross-border merger expressly consent, in the merger resolution, to the application of said provisions. Section 34 shall also apply to owners of shares in a company being acquired that is governed by the laws of some other Member State of the European Union or some other contracting

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party of the Agreement creating the European Economic Area if the laws of this state provide for a procedure to compensate minority shareholders and German courts have international jurisdiction for the implementation of such a procedure. Section 122j (Protection Afforded to the Creditors of the Company Being Acquired) (1) Where the acquiring or newly formed company is not governed by German law, the creditors of a company being acquired are to be provided security insofar as they cannot demand satisfaction of their claims. However, the creditors shall be entitled to this right only if they assert their claim in writing, citing its merits and its amount, within two (2) months of the date on which the draft terms of merger, or their initial outline, have been published by notice, and if they satisfactorily demonstrate that the cross-border merger will jeopardise the performance of the claim they hold. (2) Creditors shall be entitled to obtain security pursuant to subsection (1) only with regard to such claims that have arisen before the date on which the draft terms of merger, or their initial outline, have been published by notice, or not later than fifteen (15) days after such date. Section 122k (Merger Certificate) (1) The representative body of a company being acquired is to file an application with the register kept at the registered seat of the company for entry in same of the fact that the pre-requisites for the cross-border merger relevant to said company have been met. Section 16 subsections (2) and (3) and section 17 shall apply mutatis mutandis. The members of the representative body shall affirm that all creditors entitled to provision of security pursuant to section 122j have been provided such security in an appropriate measure. (2) The court shall review whether the pre-requisites for a cross-border merger by the company have been met and shall issue a certificate regarding this fact (merger certificate), doing so without undue delay. The notification as to the cross-border merger having been entered in the register shall be deemed a merger certificate. The entry in the register is to include the note that the cross-border merger shall enter into force subject to the pre-requisites stipulated by the laws of the state governing the acquiring or newly formed company. The merger certificate may only be issued if an affirmation pursuant to subsection (1), third sentence, has been given. Where valuation proceedings under corporate law are pending, this is to be recorded in the merger certificate. (3) The representative body of the company is to submit the merger certificate within six (6) months of its having been issued, together with the draft terms of merger, to the competent authority of that state the laws of which govern the acquiring or newly formed company. (4) Upon the court receiving a notice from the register, in which the acquiring or newly formed company has been entered, as to the cross-border merger

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having entered into force, the court having jurisdiction at the registered seat of the company being acquired is to note the date on which the cross-border merger so entered into force and is to transmit to that register the electronic documents it has been keeping safe. Section 122l (Entry in the Register of the Cross-Border Merger) (1) In the case of a cross-border merger by absorption, the representative body of the acquiring company is to file an application with the register kept at the registered seat of the company for the cross-border merger to be entered in same; in the case of a cross-border merger by new formation, the representative bodies of the companies being acquired are to file an application for entry of the newly formed company in the register kept at the registered seat of the company. The merger certificates of all companies being acquired, the common draft terms of merger and, as the case may be, the agreement regarding employee co-determination rights are to be attached to the application for entry in the register. The merger certificates may not be older than six (6) months; section 16 subsections (2) and (3) and section 17 shall not apply to the companies being acquired. (2) The audit of whether or not the pre-requisites for entry in the register of the cross-border merger have been met shall extend in particular to the matter of whether or not the owners of shares in all of the companies involved in the cross-border merger have consented to identically worded common draft terms of merger and of whether or not an agreement regarding employee co-determination rights has been concluded, where applicable. (3) The court having jurisdiction at the registered seat of the acquiring or newly formed company is to notify, ex officio, each register with which one of the companies being acquired had to lodge its records of the date on which the merger was entered with it.

References Bayer W, Grenzüberschreitende Verschmelzungen im Zeitraum von 2007 bis 2012, https://www. boeckler.de/pdf/mbf_2013_06_verschmelzungen_bayer.pdf Bayer W, Schmidt J (2006a) Der Regierungsentwurf zur Änderung des Umwandlungsgesetzes Eine kritische Stellungnahme. NZG 841–846 Bayer W, Schmidt J (2006b) Die neue Richtlinie über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften - Inhalt und Anregungen zur Umsetzung in Deutschland. NJW 59:401–406 Bayer W, Schmidt J (2012) Das Vale-Urteil des EuGH: Die endgültige Bestätigung der Niederlassungsfreiheit als “Formwechselfreiheit”. ZIP 33:1481–1492 Beutel D (2008) Der neue rechtliche Rahmen grenzüberscheitender Verschmelzungen in der EU. Utzverlag, München Drinhausen F, Keinath A (2006) Referentenentwurf eines zweiten Gesetzes zur Änderung des Umwandlungsgesetzes - Erleichertung grenzüberschreitender Verschmelzungen für deutsche Kapitalgesellschaften? BB 61:725–732

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Drygala T, von Bressendorf T (2016) Gegenwart und Zukunft grenzüberschreitender Verschmelzungen und Spaltungen. NZG 1161–1168 Forsthoff U (2006) Internationale Verschmelzungsrichtlinie: Verhältnis zur Niederlassungsfreihei und Vorwirkung; Handlungszwang für Mitbestimmungsreform. DstR 44:613–618 Henssler M, Strohn L (2014) Gesellschaftsrecht, 2nd edn. C.H. Beck, München König DC, Bormann J (2012) “Genuine Link” und freie Rechtsformwahl im Binnenmarkt Trendwende bei der Anerkennung von “Scheinauslandsgesellschaften” durch die VALEEntscheidung des EuGH? NZG:1241–1244 Krause N, Kulpa N (2007) Grenzüberschreitende Verschmelzungen. ZHR 171:38–78 Leible S, Hoffmann J (2006) Grenzüberschreitende Verschmelzungen im Binnenmarkt nach ‘Sevic’. RiW 52:161–168 Leuering D (2008) Von Scheinauslandsgesellschaften hin zu ‘Gesellschaften mit Migrationshintergrund. ZRP:73–77 Lutter M (ed) (2014) Kommentar zum Umwandlungsgesetz, 5th edn. Dr. Otto Schmidt, Köln Mock S (2016) Die rückwirkende Anwendung von Bewertungsstandards - zugleich Besprechung von BGH v. 29.9.2015 - II ZB 23/14. WM 1261–1269 Müller H-F (2006) Die grenzüberschreitende Verschmelzung nach dem Referentenentwurf des Bundesjustizministeriums. NZG 9:286–290 Münchener Kommentar zum BGB (2017) 7th edn. C.H. Beck, München Passarge M, Stark M (2007) Gläubigerschutz bei grenzüberschreitenden Verschmelzungen nach dem Zweiten Gesetz zur Änderung des Umwandlungsgesetzes. GmbHR:803–810 Schall A (2016) Grenzüberschreitende Umwandlungen der Limited (UK) mit deutschem Verwaltungssitz - Optionen für den Fall des Brexit. ZfPW 2:407–447 Schmitt J, Hörtnagl R, Stratz R-C (2016) Umwandlungsgesetz, 7th edn. C.H. Beck, München Semler J, Stengel A (2017) Umwandlungsgesetz, 4th edn. C.H. Beck, München Siems MM (2006) SEVIC: Der letzte Mosaikstein im Internationalen Gesellschaftsrecht der EU? EUZW 17:135–140 Teichmann C, Rüb C (2015) Der Regierungsentwurf zur Geschlechterquote in Aufsichtsrat und Vorstand. BB:259–267 Vetter J (2006) Die Regelung der grenzüberschreitenden Verschmelzung im UmwG - Einige Bemerkungen auch Sicht der Praxis. AG:613–626 Wöhlert H-T, Degen S (2012) Die neue Mobilität von Gesellschaften in Europa nach “Vale” und “National Grid Indus”. GWR:432–436 Sebastian Mock is Professor of Law at the Vienna University of Economics and Business in Vienna, Austria. He teaches Corporate Law, Securities Regulation, Commercial and Bankruptcy Law. After studying at the Universities of Jena and Hamburg (both in Germany), Montpellier (France), and the New York University School of Law, Sebastian obtained a PhD in Law from the University of Hamburg in 2007 and finished his Habilitation in 2012. In addition to teaching in Germany Sebastian has also taught corporate and bankruptcy law in China, Russia, and Italy. His books and articles have been published in the United States and Europe.

Experiences from the Implementation of the Cross-Border Mergers Directive in Greece Thomas Papadopoulos

1 Introduction 1.1

Greek Legislation Implementing the CBMD

This chapter examines the implementation of the Cross-border Mergers Directive1 (hereinafter, “CBMD”) in Greek law. It discusses the most important provisions of the Greek Law implementing the CBMD. The CBMD was implemented by “Law 3777/2009 on cross-border mergers of limited liability companies and other provisions” (Government Gazette A 127, 28 July 2009, pp. 5749–5754) (hereinafter, “Law 3777/2009”). Law 3777/2009 entered into force on 28 July 2009, the same date of its publication in the Government Gazette (Art. 20 of Law 3777/2009). In Greece, the CBMD was not incorporated into the main company law statutes, like some other company law directives. A separate special law implementing the CBMD in Greek law was adopted.2 Directive 2009/109/

1 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. [2005] OJ L 310/1–9 (Cross-border Mergers Directive). This Directive was repealed and codified by Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. This codification took place in the interests of clarity and rationality, because Directives 82/891/EEC and 89/666/EEC and Directives 2005/56/EC, 2009/101/EC, 2011/35/EU and 2012/30/EU have been substantially amended several times (Recital 1 of the Preamble). However, this chapter would refer exclusively to the Cross-border Mergers Directive (hereinafter, “CBMD”), which was the EU legal instrument implemented in Greek company law. 2 Kyriakopoulos (2011), p. 29. For an analysis of cross-border mergers in Greek bibliography, see: Tzakas and Rokas (2007), p. 681; Ntzoufas (2006), p. 798; Bouloukos (2006), pp. 346–352; Perakis (2006), pp. 285–287; Argyros (2007b), pp. 1003–1010; Koulourianos (2010), p. 153; Metallinos

T. Papadopoulos (*) University of Cyprus, Department of Law, Nicosia, Cyprus e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_17

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EC3 amending, among others, Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions and introducing exceptions of the publication requirements was implemented by Presidential Decree (P.D) 86/20114 in Greek law.5 This chapter cites articles and refers to the English translation of Law 3777/2009 of I. Madarou: Madarou (2010), pp. 887–898. This is the only available English translation of Law 3777/2009, as there is no official translation by the Greek authorities. Hence, all cited articles of Law 3777/2009 in this chapter come from the translation of I. Madarou.

1.2

Infringement Proceedings

The deadline for the transposition of the CBMD was 15 December 2007 (Art. 19 of the CBMD). Only 16 Member States had implemented the CBMD by the end of this deadline. The rest of the Member States confronted certain technical and regulatory difficulties with the transposition of the EU rules on cross-border mergers. The European Commission initiated on 5 June 2008 infringement proceedings against 11 Member States, which continued to be inconsistent and not to implement the CBMD.6 Finally, there were legal proceedings before the CJEU against Greece, Belgium, Sweden and Liechtenstein.7 In Case C-493/08 Commission v. Greece, the CJEU held that “by failing to adopt, within the prescribed period, the laws, regulations and administrative provisions necessary to comply with Directive 2005/56/ EC. . . on cross-border mergers of limited liability companies, the Hellenic Republic has failed to fulfil its obligations under the first paragraph of Article 19 of that directive”. This ruling of the CJEU was issued on 23 April 2009; subsequently, the Greek Law implementing the CBMD was issued in the Government Gazette on 28 July 2009. Moreover, in Case C-61/08 Commission v Greece, the CJEU held that, by imposing a nationality requirement for access to the profession of notary, Greece

(2010b), p. 182; Karagounidis (2008), p. 137; Pamboukis (2002), pp. 168, 293; Perakis (2010), p. 840. 3 Directive 2009/109/EC of the European Parliament and of the Council of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions [2009] OJ L 259/14. 4 P.D. 86/2011 Official Gazette-FEK A/208/20-9-2011. 5 Bech-Bruun and Lexidale (2013), p. 474. 6 Bech-Bruun and Lexidale (2013), p. 14. 7 Case C-493/08 Commission v. Greece [2009] ECR I-64; Case C-575/08 Commission v. Belgium [2009] ECR I-163; Case C-555/08 Commission v. Sweden [2009] ECR I-99; Case E-7/09 EFTA v. Liechtenstein [2009] EFTA Ct. Rep [2009-2010] 38. Bech-Bruun and Lexidale (2013), pp. 14, 89.

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breached the EU fundamental freedom of establishment (Art. 49 TFEU).8 This latter case also concerns the process of cross-border mergers. The CJEU noted that: “a notary is also involved in the area of company law. By way of example, acts constituting public and private limited liability companies and certain acts relating to the conversion and merger of those companies must, in accordance with the relevant provisions of Laws 2190/1920 on public limited liability companies (FEK A’ 37/30.3.1963) [companies limited by shares] and 3190/1955 on private limited liability companies (FEK A’ 91/16.4.1955) [companies with limited liability], take the form of notarial acts, in default of which they are void.”9

1.3

The Availability of Cross-Border Mergers in Greek Law Before the Adoption of the CBMD

The availability of cross-border mergers in Greek law before the adoption of the CBMD should be mentioned. Before the adoption and the incorporation of the CBMD, Greek law did not have any special rules for cross-border mergers. Only the Third Company Law Directive on Domestic Mergers (Domestic Mergers Directive, hereinafter, “DMD”)10 had been implemented. Although Greece did not have any special rules for cross-border mergers before the adoption of the CBMD, there were discussions about the possibility of cross-border mergers in Greek law. In spite of the fact that Greek theory did not reach uncontested and concrete conclusions on such availability, the prevailing view is that cross-border mergers were possible since Greek company law permitted seat transfers abroad (Arts. 29 §3 and 49a §2 of Law 2190/1920).11 As long as a Greek company could transfer its seat abroad and, subsequently, could proceed to a domestic merger with the foreign company, the whole process could be simplified and allowed through a cross-border merger.12 8

Case C-61/08 Commission v Greece EU:C:2011:340, paragraph 134. Other Member States also breached EU freedom of establishment (Art. 49 TFEU) due to nationality conditions for civil law notaries: Case C-47/08 Commission v Belgium EU:C:2011:334, Case C-50/08 Commission v France EU:C:2011:335, Case C-51/08 Commission v Luxembourg EU:C:2011:336, Case C-52/ 08 Commission v Portugal EU:C:2011:337, Case C-53/08 Commission v Austria EU:C:2011:338, Case C-54/08 Commission v Germany EU:C:2011:339 and Case C-61/08 Commission v Greece EU:C:2011:340. 9 Case C-61/08 Commission v Greece EU:C:2011:340, paragraph 23. 10 The Third Council Directive 78/855/EEC was repealed and replaced by Directive 2011/35/EU. Directive 2011/35/EU was repealed and codified by Directive 2017/1132. Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies [1978] OJ L 295/36–43. Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies [2011] OJ L 110/1–11. Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. [2017] OJ L 169/46–127. 11 Perakis (2010), pp. 839–840; Ntzoufas (2006), pp. 800–801. 12 Perakis (2010), p. 840.

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Alternatively, before the adoption of the CBMD, the outcome of a cross-border merger could be achieved with another more bureaucratic and time-consuming process: preceding dissolution, liquidation, establishment of a new company abroad, transfer of the entire property to the new company abroad and a subsequent domestic merger. This process is called “abusive merger”.13

1.4

Types of Company in Greek Law

It is necessary to refer briefly to the corporate types of public and private companies, which will be examined. These are: company limited by shares (Societe Anonyme (SA.)-Anonymous Company-Anonimi Etairia “A.E.”) and company with limited liability (Eteria Periorismenis Efthinis “E.P.E”). A company limited by shares (Anonymous Company-Anonimi Etairia “A.E.”) is a capital company in which the shareholder’s liability is limited to the amount provided for the share capital of the company. It is the purest form of capital company in Greek Law, where capital participation and not the intuitus personae prevails. It has legal personality and is regulated by Law 2190/1920.14 Of course, for listed companies limited by shares there are special provisions on securities regulation (also, according to secondary EU law).15 A company with limited liability (Eteria Periorismenis Efthinis “E.P.E”) is the equivalent of an English private company limited by shares or by guarantee. It is regulated by Law 3190/1955. This type of company is addressed mainly to small and medium-sized enterprises.16 In this chapter, citations of various articles of Law 2190/1920 and Law 3190/1955 use the translation of these articles in English provided by the book of Lambadarios Law Firm: Lambadarios Law Offices (eds) Law 2190/1920 (On Companies Limited by Shares) – Law 3190/1955 (On Limited Liability Companies) (Nomiki Vivliothiki 2011).

2 The Multi-Level Regulatory Model of the CBMD The CBMD adopts a complicated multi-level regulatory model, according to which the CBMD refers to certain provisions of national law. Art. 4(1)(b) of the CBMD states that “a company taking part in a cross-border merger shall comply with the

13

Kotsiris (2013), p. 188; Rokas (2012), p. 470. Kotsiris (2013), p. 87. 15 In the website of the Hellenic Capital Market Commission (HCMC), anyone has access to the relevant legislation translated in English: http://www.hcmc.gr/en_US/web/portal/klawenc accessed 4-4-2018. 16 Kotsiris (2013), p. 56. 14

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provisions and formalities of the national law to which it is subject”. Art. 4(2) of the CBMD states that: “The provisions and formalities referred to in paragraph 1 (b) shall, in particular, include those concerning the decision-making process relating to the merger and, taking into account the cross-border nature of the merger, the protection of creditors of the merging companies, debenture holders and the holders of securities or shares, as well as of employees as regards rights other than those governed by article 16. A Member State may, in the case of companies participating in a cross- border merger and governed by its law, adopt provisions designed to ensure appropriate protection for minority members who have opposed the crossborder merger.” Hence, it is easily understood that regulation of cross-border mergers is based on a cumulative application of national laws implementing the CBMD and of other provisions of national laws including provisions on domestic mergers. The provisions on domestic mergers derive primarily from national provisions implementing the DMD and from other national provisions adopted by the Member State, but not prescribed by the directive.17 This cumulative application might be a source of vagueness. The multilevel regulatory regime on the basis of a cumulative application of the relevant rules does not contribute to legal certainty. This vagueness could create problems to companies participating in cross-border mergers, as well as to the relevant supervisory and regulatory authorities, which must be aware in advance of the applicable rules. The multi-level regulatory model of the CBMD also applied to Greek law. Art. 4 (1)(b) of the CBMD was implemented by Art. 16 of Law 3777/2009. Art. 16 (1) of Law 3777/2009 indicates the rules applicable to cross-border mergers: “1. For the issues that are not regulated by this Law, the provisions for mergers of companies limited by shares and companies with limited liability of Law 2190/1920 and of Law 3190/1955 respectively, as well as the provisions of Law 3412/2005 and of Presidential Decree 91/2006 for European Company (Societas Europaea-SE) and the role of employees therein are applicable additionally and proportionately.[..]”18 It is very clear that a multi-level regulatory model for cross-border mergers arises from this provision. The provisions of the DMD were incorporated into Law 2190/1920 and Law 3190/1955.19 According to Art. 16(1) of Law 3777/2009, all unregulated issues of cross-border mergers should be based, by analogy, on Law 2190/1920 and Law 3190/1955, with special emphasis on their provisions on domestic mergers (Arts. 68-80 of Law 2190/1920 and Arts. 54-55 of Law 3190/1955). Additionally, Law 3412/2005 and Presidential Decree 91/2006 for European Company (Societas

17

van Eck and Roelofs (2011), p. 17. See, also: Karagounidis (2008), pp. 137, 152–154. Madarou (2010), p. 898. 19 For an analysis of the Greek provisions on domestic mergers, see: Antonopoulos (2012), pp. 106–113; Sinanioti-Maroudi (2012), pp. 372–375; Alexandridou (2016), pp. 478–482; Chrysanthis (2014), pp. 2219–2304. 18

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Europaea-SE) and the role of employees therein apply by analogy in order to cover various regulatory gaps.20 This multilevel regulatory system for cross-border mergers, which draws to a significant extent on provisions for domestic mergers, seems a little bit complicated. References to provisions on domestic mergers are sometimes confusing. Crossborder mergers might need special autonomous provisions, which are adjusted more effectively to the transnational nature of this method of corporate restructuring and which could contribute to legal certainty. For example, a special set of rules for the protection of stakeholders, which would concern only cross-border mergers, might enhance the attractiveness of this corporate restructuring technique. It is interesting to discuss the differences between cross-border and domestic mergers. With regard to domestic mergers, Greek provisions implementing the DMD allow mergers only between companies of the same corporate type. Nevertheless, companies of different corporate types can participate in cross-border mergers. Moreover, domestic mergers do not require the certificate of Ministry declaring that all formalities were fulfilled; this certificate is required for crossborder mergers. In domestic mergers taking place in Greece, there is no requirement for employee participation. However, employee participation is an important aspect of cross-border mergers.21

3 Implementation of the CBMD in Greece: A Critical Overview of the Most Important Provisions 3.1

Scope

Art. 1(2)-(3) of Law 3777/2009 specifies the scope of application of these rules: “2. The provisions of this law are applicable in the merger of one or more national limited liability companies with one or more limited liability companies formed in accordance with the law of another Member State and having their registered office, central administration or principal place of business within the Community (hereinafter referred to as ‘cross-border mergers’), or when the company that is formed by the cross-border merger of companies of different Member States has its registered office in Greece.

20

Law 3412/2005 on the regulatory framework for the establishment and functioning of the European Company, Official Gazette-FEK 276/Α/2005, 4-11-2005. Presidential Decree (P.D.) 91/2006 regulating participation of employees in European Companies (Societas Europaea-SE), Official Gazette-FEK 92/Α/2006, 04-05-2006. See, also: Regulation 2157/2001 of 8 October 2001 on the Statute for a European company (SE) [2001] OJ L 294/1–21, Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees [2001] OJ L 294/22–32. 21 Bech-Bruun and Lexidale (2013), p. 489.

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3. The provisions of this law shall not apply to cross-border mergers involving a company the object of which is the collective investment of capital22 provided by the public, [. . .]”23 Art. 2 of Law 3777/2009 provides certain essential definitions for the application of this law. It defines ‘limited liability company’: “1. For the application of this Law as ‘limited liability company’ (hereinafter referred to as ‘company’) is regarded: (a). the company limited by shares, the company with limited liability, the partnership limited by shares and the European Company (Societas Europaea-SE) that has its registered office in Greece, and (b). a company with share capital and having legal personality, possessing separate assets which alone serve to cover its debts and subjected, under the national law governing it, to conditions concerning guarantees such as those provided for by Directive 68/151/EEC for the protection of the interests of members and others.”24 The following corporate types of Greek company law could participate in a cross-border merger: companies limited by shares, companies with limited liability (EPEs, equivalent to a French Sarl or a German GmbH), partnerships limited by shares and European Companies (Societas Europaea-SE) registered to Greece may merge with any equivalent corporate type of other EU Member States.25 Moreover, private capital companies (I.K.E.)/private companies (P.C.), which are a new company form introduced recently by Law 4072/ 2012, could participate in cross-border mergers under Law 3777/2009. Law 3777/ 2009 does not specify whether companies in liquidation could participate in crossborder mergers. This point is unclear.26 Greece decided to include cooperatives within the scope of this Law.27 Additionally, Greece has also included European Companies (Societas Europaea-SE) within the scope of the national provisions on cross-border mergers, because they are public limited liability companies (companies limited by shares).28 This has also implications on the position of European Cooperatives Societies, in the framework 22

Law 3283/2004 (Official Gazette-FEK 210/Α/2.11.2004) applies to companies with the object of collective investment of capital. Bech-Bruun and Lexidale (2013), p. 477; Kyriakopoulos (2011), p. 30. 23 Madarou (2010), p. 887. 24 Madarou (2010), p. 888. 25 Perakis (2010), pp. 840–841. Art 4(1)(a) of the CBMD allows cross-border mergers “between types of companies which may merge under the national law of the relevant Member States”. The rationale of this provision is that there is a very wide legal diversity of various corporate types of limited liability companies among Member States. Insuperable technical legal barriers would be caused if types of companies, which cannot merge under national law, would be allowed to take part in cross-border mergers. Storm (2010), p. 74. 26 Bech-Bruun and Lexidale (2013), p. 475. 27 According to Art. 3(2) of the CBMD, Member States enjoy discretion whether to include cooperatives within the scope of the national provisions on cross-border mergers: “Member States may decide not to apply this 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’ as laid down in Article 2(1).” Bech-Bruun and Lexidale (2013), pp. 100, 476. 28 Bech-Bruun and Lexidale (2013), p. 100.

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of cross-border mergers. According to Art. 9 of Regulation on the Statute for a European Cooperative Society (SCE),29 the principle of non-discrimination states that: “[s]ubject to this Regulation, an SCE shall be treated in every Member State as if it were a cooperative, formed in accordance with the law of the Member State in which it has its registered office.” Hence, a European Cooperative Society with its seat in Greece can enter into a cross-border merger under Greek law. More specifically, a European Cooperative Society could merge with ‘a limited liability company’, as long as the applicable law allows cooperatives to proceed to cross-border mergers and considers them as ‘limited liability companies’.30 The Greek legislature decided not to exclude Greek cooperatives from the scope of this Law. This means that European Cooperative Societies with their seat in Greece also fall within the scope of this Law. With regard to domestic mergers, a Greek company limited by shares could merge with another Greek company limited by shares. A Greek company limited by shares cannot merge with a Greek company with limited liability. Similarly, a Greek company with limited liability could merge only with a Greek company with limited liability and not with a Greek company limited by shares. The relevant Greek provisions implement the DMD.31 However, Art. 2(4) of Law 3777/2009 allows cross-border mergers between different types of company: “National limited liability companies referred to in cases (a) and (b) of paragraph 1 of this article can be merged with any type of a foreign limited liability company that falls within the scope of this Directive.”32 Under Law 3777/2009, a Greek company limited by shares could merge with a foreign company limited by shares or with a foreign company with limited liability. Similarly, under Law 3777/2009, a Greek company with limited liability could merge with a foreign company with limited liability or with a foreign company limited by shares.33 Moreover, in the context of a cross-border merger, a Greek company limited by shares and a Greek company with limited liability could merge with a foreign company. A merger between a Greek company limited by shares and a Greek company with limited liability is possible in the framework of a cross-border merger, while this is not possible for domestic mergers.34 The possibility of cross-border mergers between different types of company, i.e. a crossborder merger between a Greek/foreign company limited by shares and a foreign/ Greek company with limited liability, is something new for Greek company law. This new possibility of cross-border mergers might also affect the interpretation of the relevant provisions on domestic mergers, as the non-availability of domestic

29 Council Regulation 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE) [2003] OJ L 207/1–24. 30 Storm (2010), p. 73. 31 Perakis (2010), p. 841. 32 Madarou (2010), p. 889. 33 Perakis (2010), p. 841. 34 Perakis (2010), p. 841.

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mergers between different types of company is contradictory in the light of the new provisions on cross-border mergers.35 The provisions of the CBMD on its scope have certain regulatory effects for Member States. First, cross-border mergers between ‘limited liability companies’ of different Member States falling within the scope of the CBMD cannot be carried out outside the provisions of the CBMD. All cross-border mergers falling within the scope of the CBMD must comply with the requirements of the CBMD.36 Secondly, Member States do not have exclusive power any more to regulate cross-border mergers of limited liability companies. The source of this lack of competence is the blocking effect’ of EU law (Sperrwirkung/Effet privatif)37 against subsequent national law, as long as national provisions are incompatible with final and complete provisions on the relevant issue regulated by a Directive or a Regulation.38 The CBMD has such final and complete provisions, although they refer to domestic law for certain aspects of the procedure.39 A watered-down version of this blocking effect is also expressed in the second sentence of the third recital to the preamble of the CBMD: “. . .[n]one of the provisions and formalities of national law, to which reference is made in this Directive, should introduce restrictions on freedom of establishment or on the free movement of capital save where these can be justified in accordance with the case-law of the Court of Justice and in particular by requirements of the general interest and are both necessary for, and proportionate to, the attainment of such overriding requirements.”40 It is easily understood that Member States enjoy discretion to regulate cross-border mergers of entities, which are not limited liability companies and which fall outside the scope of the CBMD.

3.2

The Definition of “Merger”

Three processes fall within the scope of the definition of “merger” (Art. 2(2) of Law 3777/2009): 2. For the application of this law, ‘merger’ means an operation whereby: (a) one or more companies, upon being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares; or

35

Perakis (2010), p. 841. Storm (2010), p. 73. 37 Case 106/77 Simmenthal EU:C:1978:49, Case 148/78 Ratti EU:C:1979:110 and Case C-355/96, Silhouette EU:C:1998:374. 38 Storm (2010), pp. 73–74. 39 Storm (2010), p. 74. 40 Storm (2010), p. 74. 36

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(b) two or more companies, upon being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company, in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10% of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities or shares; or (c) a company, upon being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital.41

3.3

Cash Payment

Although Greek law itself does not allow the cash payment in a cross-border merger to exceed 10% of the nominal value, it allows it only “where this is provided at least by the law of one Member State that governs one of the foreign merging companies.” (Art. 2(3) of Law 3777/2009).42 Hence, the shareholders of a Greek merging company could receive a cash payment exceeding 10% of the nominal value, only when the national law of at least one of the merging companies from other Member States permit this possibility of cash payment. This is the only way cash payments in cross-border mergers could be permitted under Greek law. This provision of the CBMD is differentiated from Art. 68 of Law 2190/1920, which concerns domestic mergers and which does not allow the amount in cash to exceed 10% of the nominal value of the shares allocated to the shareholders of the absorbed or dissolved companies.43

3.4

Procedure

The Greek legislature implemented and adjusted to the Greek company law the provisions of the CBMD on the procedure of cross-border mergers.44 Art. 3 of Law 3777/2009 refers to the common draft terms of cross-border mergers: “The management or administrative organs of each of the merging companies shall draw up the common draft terms of cross-border merger”.45 Then, the various particulars of the common draft terms of cross-border merger, which constitute its minimum content, are listed.46 41

Madarou (2010), p. 888. See, also: Perakis (2010), p. 841. Madarou (2010), p. 888. 43 Kyriakopoulos (2011), p. 30; Lambadarios Law Firm (2011), pp. 386–389. 44 For an overview of the various procedural steps of cross-border mergers in Greek company law, see: Perakis (2010), p. 842. 45 Madarou (2010), p. 889. 46 For the various particulars, see: Kyriakopoulos (2011), pp. 31–32. 42

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Art. 4 of Law 3777/2009 is dedicated to publication issues: the common draft terms of the cross-border merger, where a national company participates, are registered in the General Commercial Register with a relevant announcement in the Government Gazette (certain particulars are specified as minimum content). The most important particular, which must be included, concerns creditor protection and protection of minority shareholders (Art. 4(c) of Law 3777/2009): “(c). an indication, for each of the merging companies, of the arrangements made for the exercise of the rights of creditors and, if applicable, of any minority members of the merging companies and the address at which complete information on those arrangements may be obtained free of charge.”47 Art. 4(2) of Law 3777/2009 was added by Presidential Decree (P.D) 86/2011 implementing the Directive 2009/109/EC. This second paragraph provides an exception to the publication requirements.48 Art. 76 of Law 2190/1920, which regulates the liability of board members, applies here.49 Art. 5 of Law 3777/2009 pertains to the report of the administrative organ: “1. The administrative organ of the national merging company shall draw up a report intended for the general meeting of its members, explaining and justifying the legal and economic aspects of the cross-border merger and explaining the implications of the cross-border merger for members, creditors and employees. 2. The report shall be made available to the members and to the representatives of the employees or, where there are no such representatives, to the employees themselves, no less than one month before the date of the general meeting referred to in article 7. The abovementioned report is registered in the General Commercial Register of the Ministry of Development General Secretariat of Commerce.[. . .]”50 Art. 76 of Law 2190/1920, which regulates the liability of board members, applies here.51 Art. 6 of Law 3777/2009 regulates the independent expert report: “1. An independent expert report intended for members and made available no less than one month before the date of the general meeting referred to in article 7 shall be drawn up for each merging company. Such experts may be natural persons or legal persons and shall be appointed by the merging companies. 2. As an alternative to experts operating on behalf of each of the merging companies, one or more independent experts, appointed for that purpose at the joint request of the companies by a judicial or administrative authority in the Member State of one of the merging companies or of the company resulting from the cross-border merger or approved by such an authority, may examine the common draft terms of cross-border merger and draw up a single written report to all the members. The competent administrative authority for the appointment of the abovementioned independent experts in Greece is the Department of companies

47

Madarou (2010), p. 890; Kyriakopoulos (2011), p. 33. Bech-Bruun and Lexidale (2013), p. 479. 49 Kyriakopoulos (2011), p. 32. 50 Madarou (2010), p. 890. 51 Kyriakopoulos (2011), p. 33. 48

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limited by shares and credit of the Ministry of Development General Secretariat of Commerce. 3. The expert report shall include at least the particulars provided for by article 71 of Law 2190/1920 on companies limited by shares. The experts shall be entitled to secure from each of the merging companies all information they consider necessary for the discharge of their duties. 4. If all the members of each of the companies involved in the cross-border merger have so agreed, neither an examination of the common draft terms of crossborder merger by independent experts nor an expert report shall be required.”52 Art. 76 of Law 2190/1920, which regulates the liability of independent experts, applies here.53 According to Art. 13(a) of Law 3777/2009, an independent experts’ report is also waived in the case of cross-border mergers by absorption of a 100% subsidiary (acquisition of a company by another company that holds 100% of its titles).54 With regard to the obligation of Art. 6(3) of Law 3777/2009 that the merging companies must provide all essential information to independent experts, Greek law does not prescribe any consequences for merging companies denying or neglecting to provide such information.55 Art. 7 of Law 3777/2009 is pertinent to the approval of the cross-border merger by the general meeting: 1. After taking note of the reports referred to in articles 5 and 6, the general meeting of each of the merging companies shall decide on the approval of the common draft terms of cross-border merger. For the decision of the national merging companies the qualified quorum and majority of mergers provided for in Greek law - according to the type of company- is required.56 2. Where more types of shares exist, the decision of the general meeting on the merger has to be approved by each group of shareholders, whose rights are affected by the merger, as provided for in paragraph 2 article 72 of Law 2190/1920. 3. If at least one of the merging companies has creditors with debt securities convertible into shares, the decision on the merger has to be approved by these creditors as well. 4. The general meeting of each of the merging companies can set as a condition for completion of the cross-border merger its ratification of the provisions regarding participation of employees in the company resulting from the cross-border merger.57

These provisions pay special attention to the position of different types of shareholders, to creditors with debt securities convertible into shares and to the

52

Madarou (2010), p. 891. Kyriakopoulos (2011), p. 33. 54 Kyriakopoulos (2011), p. 34 55 Bech-Bruun and Lexidale (2013), p. 481. 56 Regarding reinforced quorum and majority for the approval of the common draft terms of crossborder merger: (1) for companies limited by shares, a quorum of two-thirds and a majority of two-thirds are necessary. (2) for companies with limited liability, a majority of at least three-quarters of partners corresponding to at least three-quarters of the capital is necessary and (3) for limited partnerships by shares, unanimity is required (Arts. 29(3)-(4) and 31(2) of Law 2190/1920 and Art. 38 of Law 3190/1955). Bech-Bruun and Lexidale (2013), p. 482; Kyriakopoulos (2011), pp. 35–36. 57 Madarou (2010), pp. 891–892. 53

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participation of employees. Reference is made to Art. 72 (2) of Law 2190/1920 on the decision of the general meeting in domestic mergers by absorption: “In case there are more categories of shares, the decision of the general meeting on the merger is subject to the approval of the specific category or categories of shareholders, whose rights are affected by the merger. The approval is granted by a decision of a special meeting of the shareholders of the category that is affected, which is taken according to the quorum and majority provisions of Arts. 29(3) and (4) and Art. 31(2) of Law 2190/1920. For the convocation of this meeting, the participation in it, the provision of information, the postponement of the decision-making, the voting, as well as the annulment of its decision, the relevant provisions on the shareholders general meeting apply mutatis mutandis.”58 Art. 9 of Law 3777/2009 regulates the pre-merger certificate: 1. The competent authority to scrutinize the legality of the cross-border merger as regards that part of the procedure which concerns merging companies subject to national law is the Department of companies limited by shares and credit of the Ministry of Development General Secretariat of Commerce. 2. The authority referred to in paragraph 1 shall issue, without delay, to the merging companies subject to national law, a certificate conclusively attesting to the proper completion of the pre-merger acts and formalities. 3. The authority of paragraph 1 of this article may issue the certificate of paragraph 2, even if the procedure of compensation of minority members of article 8 paragraph 1 b is pending. The certificate shall mention that such a procedure is pending.59

The scrutiny of the legality of the cross-border merger, as well as the determination of the competent authority are stipulated by Art. 10 of Law 3777/2009: 1. The competent authority to scrutinize the legality of the cross-border merger as regards that part of the procedure which concerns the completion of the cross-border merger and, where appropriate, the formation of a new company resulting from the cross-border merger is the Department of companies limited by shares and credit of the Ministry of Development General Secretariat of Commerce. The said authority shall in particular ensure that the merging companies have approved the common draft terms of crossborder merger in the same terms and, where appropriate, that arrangements for employee participation have been determined in accordance with article 14. 2. To this end, each foreign merging company shall submit to the authority referred to in paragraph 1 the pre-merger certificate, within six months of its issue by the authority that is competent according to the law of the relevant Member State, together with the common draft terms of cross-border merger approved by the general meeting referred to in article 7.60

Art. 11 of Law 3777/2009 designates the completion and entry into effect of the cross-border merger:

58 Lambadarios Law Firm (2011), pp. 400–401; Sinanioti-Maroudi (2012), p. 380; Alexandridou (2016), p. 485. 59 Madarou (2010), p. 893. 60 Madarou (2010), p. 893.

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1. The contract of cross-border merger is made via a notarial document, where a statement of article 8 of Law 1599/1986 (Government Gazette 75 A) is attached, that no objections have been raised by the creditors or that any objections raised have been resolved, if the acquiring company or the company resulting from the cross-border merger has its registered office in Greece. 2. The cross-border merger is completed by registration of the approval by the Ministry of Development, which is of constitutive character, in the General Commercial Register kept in the General Secretariat of Commerce of the Ministry of Development, and a relevant announcement is published by the Department of companies limited by shares and credit of the Ministry of Development in the issue of companies limited by shares and companies with limited liability of the Government Gazette. The abovementioned Department, after registration of the approval by the Minister of Development in the General Commercial Register informs, without delay, the relevant registers of the Member States, whose legislation governs the other merging companies. Any deletion of a previous registration is valid only after receipt of the relevant notification and not prior to it. 3. When approval of the cross-border merger is made by the competent authority of another member-state, the deletion of the national company that is being acquired from the General Commercial Register is made by the Department of companies limited by shares and credit of the Ministry’s of Development General Secretariat of Commerce immediately after the notification of the registration of the cross-border merger approval.61

According to Art. 11(1) of Law 3777/2009, the cross-border merger is completed only as long as “no objections have been raised by the creditors or that any objections raised have been resolved”.62 This statement is essential content of the contract being concluded via a notarial document, which will lead towards the completion of the cross-border merger. A capital increase of the acquiring company is necessary for the completion of the cross-border merger, although this requirement is not prescribed by Greek law. This capital increase enables the share exchange.63 Greece did not transpose the optional provision of Art. 4(1)(b) of the CBMD enabling national authorities to oppose a cross-border merger by exercising veto rights on grounds of public interest.64 Greece opts for and adopts veto rights in case of cross-border mergers as a method of setting up a European Company (Societas Europaea-SE), but it does not opt for and does not provide veto rights in case of cross-border or domestic mergers.65 The consequences of the cross-border merger are listed in Art. 12(1) of Law 3777/ 2009: (a) all assets and liabilities of the company being acquired shall be transferred to the acquiring company or to the new company, (b) members of the company being acquired shall become members of the acquiring company or of the new company, (c) the company being acquired or the merging companies shall cease to exist. Various other aspects of the consequences are regulated by Art. 12 (3)-(5) of Law 3777/2009:

61

Madarou (2010), p. 894; Kyriakopoulos (2011), pp. 37–38. Bech-Bruun and Lexidale (2013), p. 478. 63 Rokas (2012), p. 474. 64 Bech-Bruun and Lexidale (2013), p. 477. 65 Bech-Bruun and Lexidale (2013), p. 124. 62

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3. Where, in the case of a cross-border merger of companies covered by this law, Greek law requires the completion of special formalities before the transfer of certain assets, rights and obligations by the merging companies becomes effective against third parties, those formalities shall be carried out by the company resulting from the cross-border merger. 4. The rights and obligations of the merging companies arising from contracts of employment or from employment relationships and existing at the date on which the cross-border merger takes effect shall, by reason of that cross-border merger taking effect, be transferred to the company resulting from the cross-border merger. 5. No shares in the acquiring company shall be exchanged for shares in the company being acquired held either: (a). by the acquiring company itself or through a person acting in his or her own name but on its behalf; (b). by the company being acquired itself or through a person acting in his or her own name but on its behalf.66

According to Art 12(1)(a) of Law 3777/2009, the transfer of the property as whole from the acquired company to the acquiring company or to the new company constitutes a quasi-universal succession, which reveals also the nature of the merger as a corporate process.67 Regarding this issue, the Greek Supreme Civil and Criminal Court of Greece/Arios Pagos stated that this process is “equated with universal succession”.68 As soon as all procedural requirements of the merger process are fulfilled, the acquiring company or new company substitutes ipso jure the acquired company in all its rights and obligations without being necessary to comply with any further condition.69 Law 3777/2009 regulates various other procedural aspects of cross-border mergers, such as: acquisition of a company by another company that holds 100% of its titles (Art. 13), employee participation in management organs (Art. 14),70 nullity of cross-border merger (Art. 15) and entry into force of the provisions (Art. 17).71 Law 3777/2009 does not regulate tax aspects of cross-border mergers. There are other national provisions referring to the tax dimension of cross-border mergers. This chapter does not discuss these tax law aspects.72 Art. 14 on employee participation in management organs refers to Presidential Decree (P.D.) 91/2006 regulating participation of employees in European Companies (Societas Europaea-SE),73 which implements Council Directive 2001/86/EC supplementing the Statute for a European Company with regard to the involvement

66

Madarou (2010), pp. 894–895. Kotsiris (2013), p. 188. 68 Case 12/1999 Greek Supreme Civil and Criminal Court of Greece/Arios Pagos, Plenary session, EED 1999, 314. Kotsiris (2013), p. 188; Rokas (2012), p. 470; Antonopoulos (2012), p. 103. 69 Kotsiris (2013), p. 188. 70 See, also Perakis (2010), p. 843; Bech-Bruun and Lexidale (2013), pp. 486–487. 71 Madarou (2010), pp. 895–898. 72 For a discussion of tax law aspects of cross-border mergers in Greek law, see: Kyriakopoulos (2011), pp. 40–43; Nikolopoulos (2006), pp. 161–165. 73 Presidential Decree (P.D.) 91/2006 regulating participation of employees in European Companies (Societas Europaea-SE), Official Gazette-FEK 92/Α/2006, 04-05-2006. 67

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of employees.74 There is no mandatory employee participation in Greek company law.75 According to Greek stakeholders, the requirement is quite discouraging when none of the merging companies had in place, before the cross-border merger, a system of employee participation.76 Regarding the nullity of cross-border merger, Art. 15 of Law 3777/2009 states that: “A cross-border merger which has taken effect as provided for in article 11 may not be declared null and void.”77

4 Protection of Minority Shareholders and Creditors in the Context of Cross-Border Mergers The protection of minority shareholders and creditors in the context of cross-border mergers falls within the scope of Art. 8 of Law 3777/2009: 1. The members of a national merging company, who have contradicted the decision on the cross-border merger, can, within a month from the date that the general meeting approved the cross-border merger: (a) Demand, via a lawsuit, by the national company which participated in the crossborder merger, the buyout of their titles or shares, if the national company is being acquired or the company resulting from the cross-border merger has its registered office in another member-state, mutatis mutandis to the equivalent right of exit provided for in the procedure of transfer of registered office abroad, according to the provisions of article 49a of Law 2190/1920. To ensure payment of the buyout price, interim measures can be ordered. (b) Demand the payment of compensation, if the ratio of exchange of their securities or shares with securities or shares of the acquiring company has been set unjustifiably low, as provided for in article 77a of Law 2190/1920. The merging procedure is not suspended. The abovementioned procedure of compensation of minority members of a national merging company, due to an unfair ratio of exchange, is applicable only if an equivalent procedure exists in the legislation of the other merging companies or if the other merging companies, that have their registered office in a member-state, that does not provide for such a procedure, accept, during the approval of the draft terms of the cross-border merger, the right of the members of the national merging company to take advantage of this procedure. The decision taken under this procedure is binding for the company resulting from the cross-border merger and for all its members.

74 Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees [2001] OJ L 294/22–32. See, also: Argyros (2007a), pp. 321–334. 75 Perakis (2010), p. 843. For an overview of employee participation in the implementation of the CBMD in Greek law, see: Kyriakopoulos (2011), pp. 39–40. 76 Bech-Bruun and Lexidale (2013), p. 199. 77 Madarou (2010), p. 897. Art. 15 of Law 3777/2009 implementing Art. 17 of the CBMD uses a different title. While the title of Art. 15 of Law 3777/2009 refers to “nullity”, Art. 17 of the CBMD refers to “validity”. Bech-Bruun and Lexidale (2013), p. 487.

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2. For the protection of the rights of creditors of a national merging company limited by shares or company with limited liability, the provisions of articles 70 of Law 2190/1920 and 54 of Law 3190/1955 (Government Gazette 91 A) are applied respectively.78

The protection of minority shareholders includes an exit right for minority shareholders, in case the minority shareholders do not want to remain shareholders in the resulting company after the completion of the cross-border merger, but they do not have the possibility to sell their shares at a fair price (Art. 8(1)(a) of Law 3777/ 2009).79 The protection of minority shareholders provided by Art. 8 of Law 3777/2009 could be criticized. By granting an exit right exclusively to minority shareholders of the acquired merging company and not to minority shareholders of the acquiring company, Art. 8(1)(a) of Law 3777/2009 seems to violate the principle of equal treatment of shareholders, who disagreed with the cross-border merger of their companies. The extension of exit right to minority shareholders of the acquiring company is justified by the fact that a possible financial distress of the acquired company or the share exchange ratio might affect negatively the acquiring company.80 Moreover, the connection of exit right with the transfer of the registered office abroad neglects other grounds having negative effects on the interests of minority shareholders, such as the change of the corporate objective or even the change of the type of the company, of which the minority shareholders would become members after the cross-border merger.81 Additionally, the fact that the amount of the buyout of shares is paid only by the acquired company and not by a third party (e.g. another shareholder) might create problems to the exit of dissenting shareholders, due to capital maintenance provisions.82 Reference is made to Art. 49a of Law 2190/1920 by Art. 8(1)(a) of Law 3777/ 2009. This is a general appraisal remedy available to all types of companies limited by shares. According to Art. 8(1)(a) of Law 3777/2009, it is also available to minority shareholders in the context of cross-border mergers. Art. 49a of Law 2190/1920 states: “1. In the cases determined in paragraph 2 of the present article, one or more shareholders may request by the filing of a civil action, the repurchase of their shares by the company, if due to such reasons remaining in the company becomes, obviously, disadvantageous. The competent court is the Multi-member Court of First Instance of the registered seat of the company. This right exists on condition that the shareholders who submit the request, were present at the general meeting and voted against the relevant decision, unless, in section c of paragraph 2, the reason for the repurchase is not connected to such a decision.

78

Madarou (2010), pp. 892–893; Kyriakopoulos (2011), pp. 38–39. Schmidt (2016), p. 20. 80 Koulourianos (2010), pp. 157, 160. 81 Koulourianos (2010), p. 160. 82 Koulourianos (2010), p. 160. 79

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2. Such a repurchase may be requested: (a) if the general meeting decided the transfer of the registered seat of the company to another country. (b) the general meeting decided to introduce limitations in the transfer of shares or a change of the objects of the company, (c) in all other cases provided for in the articles of association on condition that (the articles of association) also provide for a relevant deadline for the filing of the civil action. 3. The civil action of paragraph 1 may be filed within three (3) months from the day the relevant amendment in the articles of association takes place. In section c of paragraph 2, the action can be filed within the deadline provided in the articles of association. 4. The court specifies the consideration, which must be fair and must correspond to the real value of these shares, as well as the terms of its payment. In order to determine the value of the shares, the court may order an expert’s report, which is prepared by the committee of paragraph 1 or the persons of paragraph 4 of article 9. If the petitioning shareholders do not accept the consideration, which is determined in this way, they may refuse the repurchase, but they are charged with the expenses of the trial for the determination of the value of their shares. 5. The court may decide the dissolution of the company, if the repurchase which is ordered in accordance with the present article is not completed within a specific deadline, due to a fault of the person obliged to repurchase the shares. 6. In the case of repurchase, in accordance with the present article, the provision of paragraphs 4 to 9 of article 17 applies. 7. The present article does not apply to companies with shares listed on a Stock Exchange.”83 Art. 49a of Law 2190/1920 applies to cross-border mergers, because the conditions of Art. 49a(2)(a)-(b) are fulfilled; a cross-border merger results in the transfer of the registered seat of the company to another country and in a change of the objects of the acquired company. Regarding the payment of compensation in case the ratio of exchange of their securities or shares with securities or shares of the acquiring company has been set unjustifiably low, Art. 8(1)(b) of Law 3777/2009 refers to the protection against unfair exchange ratio for domestic mergers, which is prescribed by Art. 77a of Law 2190/1920: “1. The merger is not declared null and void due to the reason that the exchange ratio between the shares of the shareholders of the absorbed company and the shares of the absorbing company is determined to be unjustifiably low. 2. In the case of paragraph 1, every shareholder of the absorbed company may claim indemnification in cash from the absorbing company. The indemnification is determined by the Single-member Court of First Instance of the company’s registered seat. The statute of limitations for the relevant claim is six (6) months from the registration in the Registry of the merger approval decision, provided for in article 74.

83

Lambadarios Law Firm (2011), pp. 346–349.

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3. The absorbing company may, following its declaration, buy the shares of the shareholders that have exercised the claim of paragraph 2 of the present article. In this case, last section of paragraph 2 of article 84 applies mutatis mutandis.”84 Art. 77a of Law 2190/1920 creates certain difficulties in the interpretation of Art. 49a of Law 2190/1920. When someone reads together Art. 77a and Art 49a of Law 2190/1920 is not sure whether the shareholder of the merging company could ask the acquisition of his shares. It should be noted that Art. 77a of Law 2190/1920, dedicated to domestic mergers, is a more special provision than Art. 49a of Law 2190/1920, which is a general mechanism for the protection of minority shareholders in Greek company law. Art. 77a (2) of Law 2190/1920 seems to ignore (or even to annul?) the possibility of minority shareholders of the merging company to invoke Art. 49a of Law 2190/1920 and to request by the filing of a civil action, the repurchase of their shares by the company. Art. 77a of Law 2190/1920 provides the minority shareholders of the merging company with another right, the possibility to claim indemnification in cash from the absorbing company.85 As far as information to shareholders is concerned, Art. 73 of Law 2190/1920 referring to domestic mergers applies by analogy to cross-border mergers. According to Art. 73(1) of Law 2190/1920, “at least one month before the date on which the general meeting will convene in order to decide upon the draft merger agreement meets, every shareholder has the right to be informed of the contents of at least the following documents, at the registered seat of the company”86: the management report, the auditor’s report, the common draft terms of cross-border merger, the annual financial statements of the last three fiscal years, the management reports issued by the board and a temporary balance sheet (an accounting statement for each company participating in the cross-border merger with a date no earlier than 3 months prior to the date of the draft terms of cross-border merger, which is issued in case the draft terms of cross-border merger are dated more than 6 months after the end of the last fiscal year to which the latest annual accounts are connected).87 Art. 73(3) of Law 2190/1920 enhances the right of shareholders to receive information by facilitating access to documents: “Following a petition by any interested shareholder, every company delivers or sends, at no cost, full copies or abstracts of the documents mentioned in paragraph 1. If a shareholder has consented to the use by the company of electronic means for conveying information, such copies may be provided by electronic mail”.88 Additionally, Art. 73(4) of Law 2190/ 1920 waives the requirement for merging companies to have the documents of 84

Lambadarios Law Firm (2011), pp. 410–413; Antonopoulos (2012), pp. 119–120; Alexandridou (2016), p. 485. In case of Art. 77a(3) of Law 2190/1920, any dispute regarding the amount payable for the shares is submitted to the Court of First Instance, which determines the amount (Art. 84 (2) of Law 2190/1920 applies by analogy to such case). Kotsiris (2013), p. 195. 85 Politis (2009), pp. 524–525, 540–541. 86 Lambadarios Law Firm (2011), pp. 400–403; Sinanioti-Maroudi (2012), p. 380; Alexandridou (2016), pp. 484–485. 87 Kyriakopoulos (2011), p. 35. 88 Lambadarios Law Firm (2011), pp. 404–405.

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paragraph 1 available at its registered office, if these documents are available on its website free of charge for the public.89 This right of shareholders to receive information contributes to a better protection of minority shareholders.90 They get the essential knowledge of the corporate affairs and of the details of the merger agreement, which helps them to reach their decision on the merger and to defend appropriately their interests. With regard to creditor protection in cross-border mergers, Art. 8(2) of Law 3777/ 2009 refers to the relevant articles on creditor protection in domestic mergers (Arts. 70 of Law 2190/1920 and 54 of Law 3190/1955). Art. 70 of Law 2190/1920 states “[. . .] 2. Within a period of twenty (20) days from the publications provided for in the previous paragraph,91 the creditors of the companies to be merged, the claims of which were born before the draft merger agreement was submitted to the publicity formalities of paragraphs 3 and 3a of article 69, as the case may be, and which had not become due and payable on the publication date, have the right to ask for, and the companies are obliged to provide them with, sufficient guarantees if the financial situation of the companies to be merged renders such protection necessary and under the condition that these creditors have not already received such guarantees. The guarantees that will be granted to the creditors of the absorbing company may be different from the ones that will be granted to the creditors of the absorbed company or companies. 3. Any dispute that may arise from the application of the previous paragraph is resolved by the Single-member Court of First Instance of the registered office of any of the companies to be merged, which in this case applies the judicial procedure of articles 682 et seq. of the Code of Civil Procedure, following an application of the interested creditor. The application is filed within a deadline of thirty (30) days, which starts from the publications provided by paragraph 1, as the case may be. By its judgement, the court takes the measures it deems sufficient and appropriate to safeguard the claim of the creditor or to address the situation created by the failure of the company to take sufficient protection measures. A condition for taking measures is the credible demonstration by the creditor that due to the merger the satisfaction of his claims is at stake and that no adequate safeguards have been taken by the company. The above judgment of the Single-member Court of First Instance is not subject to ordinary and extraordinary legal remedies. 4. In case there exist creditors with bonds convertible to shares of at least one of the companies to be merged, the merger decision must be approved by these creditors. The approval is provided by a decision taken in a bond-holders meeting, which convenes only for the provision of this approval with the quorum and majority percentages determined by article 29 paragraphs 1 and 2 and article 31 paragraph

89

Lambadarios Law Firm (2011), pp. 404–405. Rokas (2012), p. 476; Antonopoulos (2012), pp. 115–116. 91 According to Art. 70(1) of Law 2190/1920, “. . .a summary of the draft merger agreement is published in one daily financial newspaper. . .” 90

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1, which are calculated on the total amount of the bond loans of each company. For the convocation of this meeting, the participation in it, the provision of information, the postponement of the decision-making, the voting, as well as the annulment of its decisions, the relevant provisions on the shareholders general meeting apply mutatis mutandis. In case of non-approval of the merger decision by the above special bondholders meeting, the relevant provisions of paragraph 3 apply mutatis mutandis. 5. The absorbing company grants rights at least equal to the ones that they had in the absorbed company to the holders of other securities, besides shares, from which special rights derive, except if each holder has approved the amendment of his rights”92 Moreover, Art. 7 (3) of Law 3777/2009 should be read in conjunction with Art. 70 (4) of Law 2190/1920. Art. 7 (3) of Law 3777/2009 requires the approval of the cross-border merger by creditors with debt securities convertible to shares, but it does not provide any further details. Regarding domestic mergers, this process of the approval by creditors with bonds convertible to shares is specified in detail by Art. 70 (4) of Law 2190/1920. This process is also applicable by analogy to cross-border mergers. With regard to creditor protection in cross-border mergers of companies with limited liability, Art. 8(2) of Law 3777/2009 refers to the relevant provisions of domestic mergers of companies with limited liability. These provisions for domestic mergers apply also to the cross-border mergers of companies with limited liability. Art. 54 of Law 3190/1955 on Companies with Limited Liability states: “1. For the merger of companies with limited liability, [. . .], a decision of the partners meeting is required taken according to the majority provisions of article 38. 2. The merger may be effected only after two months from the publicity of a summary of the decisions of the partners meetings on the merger by the care of the administrators, in the Bulletin mentioned in article 8(3) and two times in at least one daily newspaper published in the registered seat of the company, provided that within two months from the publicity none of the creditors of the merging companies that existed prior the last publicity objects in writing. 3. Following a petition of the interested company, the chairman of the Court of First Instance hearing the case according to the procedure of article 634 of Civil Procedure Code may permit the merger provided that sufficient guarantee is offered to the creditors of the previous paragraph, despite their objections.”93 Greek law also provides creditor protection in case of cross-border mergers used as a method of establishment of a European Company (Societas Europaea-SE).94 Another provision contributing to the protection of minority shareholders and creditors is Art. 76 of Law 2190/1920, which regulates the liability of board

92

Lambadarios Law Firm (2011), pp. 394–397. See, also Kotsiris (2013), pp. 191–192; Rokas (2012), p. 475; Antonopoulos (2012), pp. 113–115; Sinanioti-Maroudi (2012), pp. 378–379; Alexandridou (2016), pp. 482–483. 93 Lambadarios Law Firm (2011), pp. 644–645. 94 Bech-Bruun and Lexidale (2013), p. 117.

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members and independent experts. According to this provision, shareholders and creditors could sue board members and independent experts. This provision applies to domestic mergers. Art. 16 (1) of Law 3777/2009, which specifies the rules applicable to cross-border mergers, refers to Law 2190/1920 and to Law 3190/ 1955 for the unregulated matters. Hence, the absence of provisions on liability in the CBMD and in Law 3777/2009 allows the application of Art. 76 of Law 2190/ 1920 to cross-border mergers. Art. 76 of Law 2190/1920 states: “1. Every member of the board of directors of the absorbed company or companies is liable towards the shareholders of these companies and third parties for every fault during the preparation and the realization of the merger. 2. Every member of the committee provided for in article 71 is liable towards the shareholders of the absorbed company or companies and third parties for every fault during the execution of his duties”95

5 Gold-Plating of the Transposition of the CBMD into Greek Law and Optional Provisions Gold-plating96 was a phenomenon, which made its appearance in Greek law implementing the CBMD. In Greek Law implementing the CBMD, certain provisions of the directive were gold-plated. Although gold-plating results in a wide legal diversity and adds further procedural burdens to merging companies, it could quite often contribute to a more comprehensive and sophisticated regime for crossborder mergers, which leads to greater legal certainty for the whole procedure. Greece gold-plated Art. 1 of the CBMD by applying Law 3777/2007 to crossborder mergers of companies from Member States other than Greece, when the

95

Lambadarios Law Firm (2011), pp. 408–409; Kyriakopoulos (2011), p. 32; Kotsiris (2013), p. 194; Sinanioti-Maroudi (2012), p. 380; Alexandridou (2016), p. 485. For an extensive analysis of Art. 76 of Law 2190/1920, see: Antonopoulos (2012), pp. 116–118. 96 It is necessary to give a definition of gold-plating provided by the European Commission: “When transposing directives into national law, refinements and add-ons occur (such as technical requirements, labelling obligations, deadlines, authorisation procedures and other administrative requirements). These, sometimes referred to as ‘gold plating’ can go well beyond the requirements set out in EU law, resulting in extra costs and burdens for citizens and market operators. Gold-plating may put national businesses at a competitive disadvantage compared with other countries. To avoid gold-plating, EU regulations may be a powerful simplification tool. The use of a (directly applicable) regulation removes the scope for Member States to elaborate on the EU rules, enables immediate application and guarantees that all actors are subject to the same rules at the same time.” Source: https://web.archive.org/web/20080508025926/http://ec.europa.eu:80/governance/ better_regulation/simplification_en.htm. accessed 11-3-2018. Gold-plating is connected with overregulation and overimplementation of EU secondary legislation. The disadvantages of goldplating are: (1) Bureaucratic and burdensome requirements/red tape, (2) Extra costs and burdens for citizens and market operators, (3) It may put national businesses at a competitive disadvantage compared with other Member States, (4) Restriction of freedom of parties.

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company resulting from this cross-border merger is established and has its registered office in Greece (Art. 1(2) of Law 3777/2009).97 Hence, Law 3777/2007 applies to the situation where two or more EU non-Greek companies proceed to a cross-border merger and the resulting company is a company with its seat in Greece. The resulting company established in Greece must be a corporate type of Greek company law (“a Greek company”), as Greece is a real seat jurisdiction.98 Greece gold-plated also some other provisions. Art. 6 of the CBMD, which refers to publication, is also gold-plated. Art. 4(2) of Law 3777/2009 grants an exception to publication (and to remain published) in the sub-directory of the website of the General Commercial Registry.99 Additionally, the directive’s provision on the approval by the general meeting (Art. 9 of the CBMD) is also gold-plated. According to Art. 7(1) of Law 3777/2009, reinforced qualified quorum and majority are required for the decision of the Greek merging companies.100 With regard to registration of Art. 13 of the CBMD, the Greek legislature goldplated this provision. In Art. 11 of Law 3777/2009, the Greek legislature introduces an additional condition, which is not required by the CBMD. According to Art. 9 of the CBMD, the common draft terms of cross-border merger must be approved by the general meeting of each of the merging companies, which is followed by the registration of the cross-border merger to the relevant competent authority.101 The implementation of the CBMD in Greek law adds a further requirement, which constitutes an additional intermediary stage. More specifically, Art. 11 of Law 3777/2009 demands, after the approval of the common draft terms of cross-border merger by the general meeting and before registration of the cross-border merger, a contract of cross-border merger between the merging companies, which must be made via a notarial document and which states that the merging companies solemnly proclaim that they merge.102 It is obvious that Greek legislature gold-plated the procedure of cross-border mergers by adding a further stage. However, this further condition is not met only in Art. 11 of Law 3777/2009. This additional intermediary stage is also required by the Greek provisions implementing the DMD, as well as by the European Company (Societas Europaea-SE), although it is not required by these two harmonizing legal instruments. A contract with notarial document is required for domestic mergers (Art. 74 of Law 2190/1920) and for the merger of companies as a method of setting up a European Company (Societas Europaea-SE) (Art. 10 of Law 3412/2005), while neither the DMD, nor the European Company Statute require such a contract.103

97

Bech-Bruun and Lexidale (2013), p. 137. Bech-Bruun and Lexidale (2013), p. 477. 99 Bech-Bruun and Lexidale (2013), p. 149 100 Bech-Bruun and Lexidale (2013), p. 158. 101 Perakis (2010), p. 842. 102 Perakis (2010), p. 842; Bech-Bruun and Lexidale (2013), p. 160. For a US perspective on M&A contracts, see also: Coates (2016), pp. 29–65; Coates IV (2012a), pp. 295–342; Coates IV (2012b). 103 Perakis (2010), p. 842. 98

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When the resulting company is a company subjected to Greek law (Arts. 12 and 13 of the CBMD), the requirement for such a contract being concluded via a notarial document does not create any problems to the process of the cross-border merger. However, the requirement for such a contract with notarial document applies also to cases, where the resulting company is not subjected to Greek law, but to law of another Member State.104 A problem could be caused when the foreign jurisdiction of the resulting company (acquiring company or new company) does not require such a contract, which is concluded via a notarial document, while Art. 11 of Law 3777/2009 asks for such a contract (e.g. a cross-border merger between a Greek acquired company and an Italian acquiring company, where Italian law implementing the CBMD does not require such a contract being concluded via a notarial document).105 Although this additional requirement of Art. 11 of Law 3777/ 2009 does not exist in the CBMD, compliance with this requirement is encouraged, as a cautionary measure.106 Nevertheless, even if this contract with notarial document is skipped, the completion of the cross-border merger would not be affected negatively, because, according to Art. 15 of Law 3777/2009, “a cross-border merger which has taken effect as provided for in article 11 may not be declared null and void”.107 The leniency in the nullity of cross-border mergers might allow skipping this additional requirement without any serious repercussions on the process of the cross-border merger. With regard to employee participation, Art. 16(7) of the CBMD was gold-plated. Art. 16(7) of the CBMD states: “When the company resulting from the cross-border merger is operating under an employee participation system, that company shall be obliged to take measures to ensure that employees’ participation rights are protected in the event of subsequent domestic mergers for a period of three years after the cross-border merger has taken effect, by applying mutatis mutandis the rules laid down in this article.” The gold-plated provision of Art. 14(7) of Law 3777/2009 stares that: “The companies that have their registered office in Greece and fall within the scope of this law have the obligation to notify in writing the number of employees and the number of employee representatives, according to the previous paragraphs, to the competent departments of the Ministry of Employment and Social Protection (Labour Inspectors Corps, Department of Social Inspection) within three months from its entry into force. For the companies that will be merged after the publication of this law, the three-month period begins after completion of the merging procedure, as set out in paragraph 2 of article 11 of this law.”108 Hence, this obligation to notify, upon completion of the cross-border merger, the number of employees and employees’ representatives catches all merged companies registered in Greece.109

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Perakis (2010), p. 842. Perakis (2010), pp. 842–843. 106 Perakis (2010), p. 843. 107 Perakis (2010), p. 843. 108 Madarou (2010), p. 897. 109 Bech-Bruun and Lexidale (2013), p. 170. 105

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Greek legislature decided not to gold-plate certain provisions and chose to opt-out of some other optional provisions. Art. 13 of Law 3777/2009110 implements Art. 15 (1) of the CBMD. Art. 15(2) of the CBMD was not implemented. Greece did not gold-plate Arts. 8(4) and 15 of the CBMD and did not include additional exceptions in Greek law.111 No additional documents were included in Art. 13 of Law 3777/ 2009.112 Greece did not transpose Art. 3 of Directive 2009/101/EC.113 The implementation of the CBMD in Greek law does not have any linguistic requirements.114 From a textual interpretation of Art. 1(2) of Law 3777/2009, it is understood that Greece allows only cross-border mergers with EU companies: “. . .with one or more limited liability companies formed in accordance with the law of another Member State and having their registered office, central administration or principal place of business within the Community. . .” [emphasis added]. Greece could have goldplated this provision and could have extended the geographical scope of its Law on cross-border mergers by allowing explicitly cross-border mergers with non-EU companies.115 The expansion of the geographical scope of Law 3777/2009 would allow Greek companies to proceed to corporate restructuring techniques, such as cross-border mergers, with non-EU companies. This would encourage companies from non-EU countries to cooperate and to consolidate with Greek companies. Thus, economic relations between Greece and non-EU countries could be strengthened. The Greek economy, which is recovering from a long and heavy financial crisis, needs such bonds with non-EU countries, which could attract additional investments to Greece. The expansion of the geographical scope of Law 3777/2009 to non-EU companies would provide additional possibilities for efficiency gains and cost savings to Greek companies and would contribute to the extroversion of the Greek economy. By including non-EU companies within the scope of Law 3777/2009, Greek companies would benefit from the advantages of the CBMD outside the scope of the internal market. Nevertheless, another view supports that Greek law neither prohibits nor allows cross-border mergers with non-EU companies and, as a result, the issue of expansion of the geographical scope is unclear.116 Furthermore, another

Art. 13 of Law 3777/2009 states: “If the cross-border merger is made by a company, that holds all the titles or shares, which offer the right to vote in the general meeting of the company or the companies being acquired: a). the provisions of points (b), (c) and (e) of article 3, article 6 and point (b) of paragraph 1 of article 12 of this Law are not applicable and b). paragraph 1 of article 7 is not applicable regarding the company or the companies being acquired.” Madarou (2010), p. 895. 111 Bech-Bruun and Lexidale (2013), p. 481. 112 Bech-Bruun and Lexidale (2013), p. 486. 113 Bech-Bruun and Lexidale (2013), p. 173. Directive 2009/101/EC of the European Parliament and of the Council of 16 September 2009 on coordination of safeguards which, for the protection of the interests of members and third parties, are required by Member States of companies within the meaning of the second paragraph of Article 48 of the Treaty, with a view to making such safeguards equivalent. [2009] OJ L 258/11–19. 114 Bech-Bruun and Lexidale (2013), p. 487. 115 Bech-Bruun and Lexidale (2013), p. 14 116 Bech-Bruun and Lexidale (2013), p. 106. 110

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view argues that cross-border mergers between Greek and non-EU companies are possible.117 It is recommended the Greek legislature to adopt a provision stating clearly that cross-border mergers with non-EU companies are allowed. Thus, any ambiguity would be avoided. In future amendments of Greek provisions implementing the CBMD, Greek legislature could expand the geographical scope of the CBMD as much as possible through gold-plating. Greece could use cross-border mergers as a tool of attracting as many indirect seat transfers/indirect reincorporations as possible. The establishment of new companies in Greece through cross-border mergers would be very beneficial for the Greek economy.

6 Reincorporations and Cross-Border Mergers in Greek Law Greece is a real seat theory jurisdiction. In Greek private international law, the law applicable to companies is based on Art. 10 of the Greek Civil Code, which states that the legal capacity (capacity to be the subject of rights and duties118) of a legal person is determined by the law of its seat. Case law and theory interpreted Art. 10 of the Greek Civil Code as adopting the real seat theory.119 Greek law permits, under certain conditions, the transfer of the seat of a Greek company limited by shares abroad (outbound reincorporations). Art. 29 (3) of Law 2190/1920 requires an increased quorum, among others, for the general meeting deciding the change of company’s nationality. More specifically, in this general meeting, the quorum is at least two thirds (2/3) of the paid-up share capital (if quorum of 2/3 is not achieved, the subsequent repeat meetings require lower quorums of 1/2 and 1/3). Increased majority of two thirds (2/3) of the votes represented in the general meeting is also required (Art. 31 (2) of Law 2190/

117

While Law 3777/2009 applies to cross-border mergers between Greek companies and EU companies (see, Art 1(2) mentioned above), there is no special provision regulating the crossborder merger between a Greek company and a non-EU company. Although there is no special provision on such cross-border mergers, it was argued that they are also permitted under Greek law. The argument in favour of a cross-border merger between a Greek company and a non-EU company is that Greek law allows transfer of the seat of a Greek company to a non-EU country without dissolution and liquidation. It is possible to achieve a cross-border merger in two separate stages; a Greek company could first transfer its seat to a non-EU country and then could proceed to a domestic merger with the non-EU company under the law of the non-EU country, as long as the law of the non-EU country allows domestic mergers. Hence, it would be a meaningless and unnecessary complication not to allow this cross-border merger in a single stage. Nevertheless, in a cross-border merger between a Greek company limited by shares and a non-EU company, Art.49a of Law 2190/ 1920 on minority shareholders’ protection should also be applied by analogy, due to the transfer of the registered seat of the company to another country. Metallinos (2010a), p. 97. 118 Legal persons are equated with natural persons. Agallopoulou (2005), p. 59. 119 Agallopoulou (2005), p. 60.

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1920). Moreover, minority shareholders have the right to request the repurchase of their shares by the company, if the general meeting decides on the transfer of the registered seat of the company to another country (Art. 49a(2) of Law 2190/1920). It could be clearly inferred from these articles that Greek law permits transfer abroad of the seat of a Greek company limited by shares. There was an ambiguity about whether seat transfer of a Greek company entails its dissolution and liquidation. After the adoption of Art. 49a (2) of Law 2190/1920, it is argued that seat transfer of a Greek company does not entail its dissolution and liquidation. Otherwise, the provision of Art. 49a of Law 2190/1920 would be meaningless.120 Regarding a company with limited liability, Law 3190/1955 allows seat transfer abroad. The relevant decision is taken unanimously. Art. 38 (3)(a) of Law 3190/1955 refers to amendments of the incorporating contract/articles of association and states: “Unless otherwise stipulated in the present Law, a decision taken with the consent of all partners is required for: a) the amendment of the company’s nationality (. . .)”. There is no special provision regarding the transfer of the seat of a foreign company to Greece (inbound reincorporation). It was argued that, as long as the law of the seat of the foreign company allows this seat transfer, Greek law should also accept this transfer. In this case, articles of association should be amended in compliance with Greek company law and the company should follow the registration rules and the formalities of Greek company law.121 Compliance with all Greek substantive company law rules and establishment of the connecting factors of Greek private international law are required. It is interesting to see the relationship between reincorporations and cross-border mergers. Although Greek law allows under certain conditions outbound and inbound reincorporations, the current regime is characterized by obscurity and certain disadvantages. Cross-border mergers constitute a very important corporate restructuring technique. A reincorporation entails the transfer of the registered office and the subsequent change of applicable law. A company from another Member State could transfer its seat and be established in Greece through a cross-border merger. Thus, a reincorporation of a company from an EU jurisdiction into Greece could take place through a cross-border merger. Moreover, a Greek company could transfer its seat and be established in another Member State through a cross-border merger. Hence, a cross-border merger could be used as an alternative to reincorporations, which results in a change of the law applicable to companies. These de facto reincorporations taking place through a cross-border merger under the CBMD are implemented by setting up a new ‘shell’ company (usually a subsidiary) in another

120

Metallinos (2010a), pp. 94–95. For a discussion of the conditions of seat transfer of companies limited by shares and of companies with limited liability (Art. 29 (3) and Art. 31 (2) of Law 2190/ 1920 and Art. 38 (3) of Law 3190/1955), see: Kiantos (2005), pp. 161–168. For an analysis of seat transfers of Greek Sea Trading Companies of Law 959/1979, see: Karagounidis (2005), pp. 1315, 1337–1347. For an interesting article on the relationship between EU Company Law and Greek Sea Trading Companies of Law 959/1979, see: Tellis (2008), p. 353. 121 Metallinos (2010a), p. 95.

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Member State (e.g. Greece or another Member State) and then merging the parent company ‘into’ the newly formed foreign/Greek company.122 More specifically, according to Art. 2(2) of the CBMD, as implemented by Art. 2 (2) of Law 3777/2009 in Greek law, there are three methods for carrying out a crossborder merger. First, one or more companies from another EU Member State, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, which is a company established and registered in Greece. Secondly, two or more companies from other Member States, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company, which is a company established and registered in Greece. Thirdly, a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital, which is a company established and registered in Greece. All these methods for carrying out a cross-border merger could be used as an alternative to reincorporations. Greek Company Law does not have a consolidated system for inbound reincorporations, which leads to lack of legal certainty. This makes indirect inbound reincorporations through cross-border mergers quite attractive. If an EU company wishes to transfer its registered office to Greece and be converted into a Greek company, it could do this through the relevant mechanisms of Greek company law, which are not based on consolidated and specific provisions dedicated to this inbound reincorporation process. Alternatively, the EU company could proceed to an indirect inbound reincorporation through a cross-border merger, which would result in its seat transfer to Greece. The direct reincorporation is simpler than the indirect, as the company retains its legal personality. However, Greek law does not have explicit provisions regulating direct inbound reincorporations and the whole process of direct inbound reincorporations is based on a theoretical approach. The indirect reincorporation through a cross-border merger is more complex, as it requires the existence of an already established company or the new establishment of the resulting company in Greece or abroad. Nevertheless, the lack of specific provisions in Greek law dedicated to direct inbound reincorporations makes indirect reincorporation through a cross-border merger a quite convenient alternative, despite some disadvantages. A perspective on the economic recovery of Greece, which could help Greece to overcome the negative impact of the financial crisis, is to become a popular destination for the establishment of new companies. Greece could accrue certain economic benefits from both direct and indirect inbound reincorporations. Many investors might choose Greece as the seat of their companies due to various reasons: strategic location, EU member and member of the Eurozone, human resources, a developed services sector and economic potential and opportunities. A future amendment of the regulatory and tax regime might also constitute an additional motive for establishing a company in Greece. Various international groups of

122

Gerner-Beuerle et al. (2016), pp. 216, 333, 345.

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companies consisting of networks of parents and subsidiaries could be established in Greece. Either the parent company or the subsidiaries could be registered in Greece. Quite often, many foreign parent companies have a subsidiary registered in Greece. Moreover, a Greek parent company could control and manage a wide number of foreign subsidiaries. The provisions of the Greek Law on cross-border mergers could constitute a very useful tool for the corporate reorganizations of these groups of companies connected with Greece. Subsidiaries and parent companies could merge under the relevant provisions. Cross-border mergers could be used as a leverage for attracting indirectly more reincorporations of companies in Greece. Greece does not have national rules on cross-border divisions. The European Commission proposed the adoption of new rules on cross-border divisions. In April 2018, the European Commission issued a Proposal for a Directive amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions.123 If this proposed Directive would not be adopted, the Greek legislature should proceed to the adoption of autonomous national provisions on cross-border divisions. Crossborder divisions would be essential for Greek companies wishing to restructure their business at a cross-border level and to transfer part of their operations to another company abroad. During the period of the financial crisis, many Greek companies decided to transfer their seat abroad. If Greece would have provisions on crossborder divisions, some of the Greek companies might have proceeded to crossborder divisions instead of transferring their seat to another Member State.

7 Stakeholders’ Views and Cross-Border Mergers Activity The examination of the experiences from the implementation of the CBMD in Greece should consider carefully the perspectives of Greek stakeholders involved in cross-border mergers. This feedback of Greek stakeholders comes from the “Study on the Application of the Cross-Border Mergers Directive” (hereinafter the ‘Study’) prepared by Bech-Bruun and Lexidale for the European Commission. Greek stakeholders described the evolution of the legal regime of cross-border mergers in Greece before the adoption of the CBMD. In 1954, the Greek Council of State (Simvoulio tis Epikratias) ruled that the denial of the Greek Minister of Commerce to authorize the cross-border merger between a bank registered in UK and a bank registered in Greece was lawful; Greek Law 2253/1953 on mergers between banks permitted only domestic mergers between Greek banks having the type of companies limited by shares.124 Hence, back in the 1950’s, the Greek

123

Proposal for a Directive of the European Parliament and of the Council amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. COM/2018/241 final, 2018/ 0114 (COD). 124 Case 722/1954, the Greek Council of State (the Greek Supreme Administrative Court) EEAN 1953-54, 190-192.

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Council of State ruled that cross-border mergers were prohibited.125 However, in 2002, the Greek Legal Council of State (Nomiko Simvoulio tu Kratus) gave an opinion that cross-border seat transfers were allowed in Greek law; as a result, even in the absence of special national provisions for cross-border mergers, a big Greek bank absorbed a foreign subsidiary located in France.126 This took place through two stages. First, the foreign company transferred its seat to Greece. Subsequently, this company merged with the Greek company, in accordance with the rules on domestic mergers.127 More specifically, the opinion 58/2002 of the Greek Legal Council of State declared that the absorption of the 100% French bank subsidiary (Banque Nationale du Grece, France) by the Greek parent bank (National Bank of Greece) was lawful. Opinion 58/2002 stated that, taking into account Art 10 of the Greek Civil Code, Art. 78 of Law 2190/1920, Art. 1 of Law 2578/1998 and the DMD, cross-border mergers of banks, which are companies limited by shares, are possible, according to the formalities and procedures prescribed by the law of the seat of each of these companies. Greek stakeholders also stressed the advantages of the multi-level regulatory model of the CBMD, which is characterized by a combination of principles. Cross-border mergers are regulated partly by national law, with which national competent authorities feel comfortable and partly by harmonized provisions, which provide the essential coordination at EU level.128 Moreover, Greek stakeholders stress the benefits of cross-border mergers, such as the development of business activities by taking advantage of the internal market and the promotion of restructuring and cooperation of Greek companies with other EU companies.129 The possibility to use the CBMD as a method of indirect seat transfers is considered by Greek stakeholders as a very positive element of the CBMD, which adds to flexibility and competitiveness.130 Moreover, Greek stakeholders think that Art. 15 of Law 3777/2009 regarding the validity of cross-border mergers is a very important advantage and contributes to legal certainty, because the cross-border merger process cannot be overturned and cannot be declared null and void.131 In the context of their first cross-border mergers, practitioners from Greece declared that they had to cooperate very closely and sometimes actually to guide through advises the national competent authority. This close cooperation in their first cross-border mergers was essential due to the inexperience in such corporate restructuring techniques of both practitioners and national competent authorities.132

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Bech-Bruun and Lexidale (2013), p. 35. Bech-Bruun and Lexidale (2013), p. 35. 127 Bech-Bruun and Lexidale (2013), p. 198. 128 Bech-Bruun and Lexidale (2013), p. 198. 129 Bech-Bruun and Lexidale (2013), p. 198. 130 Bech-Bruun and Lexidale (2013), p. 199. 131 Bech-Bruun and Lexidale (2013), p. 199. 132 Bech-Bruun and Lexidale (2013), pp. 134, 199. 126

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Furthermore, Greek stakeholders believe that different company laws applying to cross-border mergers are not always a problem. Sometimes, certain benefits could derive from them. For example, when delisting from a stock exchange is difficult under a specific national company law, a cross-border merger leading to corporate transformation could constitute a method of indirect delisting. Hence, an indirect delisting could take place either through an inbound merger with a foreign company followed by a subsequent change of the corporate type or through a transfer of the seat abroad via an outbound cross-border merger followed by a subsequent change of the corporate type.133 As far as the level of cross-border mergers activity is concerned, certain crossborder mergers took place in Greece. The subsidiary of Sony in Greece participated in a cross-border merger of various subsidiaries located in EU Member States: Sony Italia S.P.A., Sony Poland SP Z.O.O., Sony Portugal Unipessoal Lda, Sony Hellas SA, Sony Central and Southeast Europe Kft, Sony Espana S.A., Sociedad Unipersonal and SONY ESPANA SA were merged into Sony Europe Limited in 2010.134 Sony is a multinational company doing business in electronics, gaming, entertainment, and financial services.135 Additionally, an important cross-border merger, which took place under the provisions of the CBMD, was related to the Greek and Cyprus banking sector. A Greek bank, Marfin Egnatia Bank AE (company limited by shares), was merged by absorption with the Cyprus bank, Marfin Popular Bank Public Co Ltd (public company). The Cyprus bank absorbed the Greek bank. In the stakeholders’ consultation of the Study, a Greek law firm mentioned that a proposed merger between a Greek listed company and a Spanish company was abandoned, because of issues arising from employee participation in management organs.136

8 Concluding Remarks “Law 3777/2009 on cross-border mergers of limited liability companies and other provisions” implemented the CBMD in Greece. Although Greece delayed in its implementation and there was an infringement proceeding before the CJEU, the CBMD was finally implemented successfully. Greek companies enjoy now the possibility to proceed to cross-border mergers. Additionally, two or more foreign companies could establish through a cross-border merger a new company in Greece. The CBMD and, as matter of fact, Law 3777/2009 are very important developments for a jurisdiction without any prior rules on cross-border mergers, such as Greece.

133

Bech-Bruun and Lexidale (2013), p. 199. Bech-Bruun and Lexidale (2013), p. 51 135 Bech-Bruun and Lexidale (2013), pp. 50–51 136 Bech-Bruun and Lexidale (2013), pp. 73, 199. 134

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This chapter provided a critical overview of the most important provisions implementing the CBMD in Greece by discussing the advantages and the disadvantages of Law 3777/2009. The choices of the Greek legislature are examined and the various deficiencies of Law 3777/2009 are scrutinized. In a possible future amendment, Law 3777/2009 could be ameliorated with the rectification of these deficiencies. Art. 4(1)(b) of the CBMD introduces a multi-level regulatory model referring to national law of the company participating in a cross-border merger. The Greek legislature complied with this inherent regulatory element of the CBMD and adjusted this multi-level regulatory model to Greek law. Law 3777/2009 just follows this regulatory structure with reference to provisions of domestic mergers and of the rest of national company law. With regard to the protection of minority shareholders and creditors, the Greek legislature considers the conflicting interests of various stakeholders in cross-border mergers: the majority-minority shareholders conflict, the management-shareholders conflict and the conflict between the company and its creditors. Additionally, the gold-plating of the transposition of the CBMD into Greek law reveals the willingness of the Greek legislature to adjust the requirements of the CBMD to the existing legal framework of Greek company law and to structure a more comprehensive and detailed legal framework for cross-border mergers in Greece. While gold-plating is connected with wide legal diversity and additional burdens for companies from different Member States participating in a cross-border merger, it contributes quite often to legal certainty and to compatibility with domestic law. Moreover, the analysis of the relationship between reincorporations/seat transfers and cross-border mergers in Greek law reveals the benefits that crossborder mergers offer to Greek companies. After the implementation of the CBMD, Greece has a consolidated legal framework for cross-border mergers. Before the implementation of the CBMD in Greece, non-harmonized cross-border mergers were possible under the SEVIC case137 of the CJEU, which characterized cross-border mergers as an exercise of the EU fundamental freedom of establishment. The possibility of non-harmonized cross-border mergers is full of uncertainty and ambiguity.138 The harmonized legal framework for cross-border mergers made possible for the first time a corporate restructuring technique, which was either impossible or extremely difficult in the past. Despite the various deficiencies of CBMD, Greece could accrue important gains from this harmonized regime. The adoption of the CBMD was a major step towards an effective M&As market at EU level, characterized by legal certainty. Greece is now part, with the rest of EU Member States, of this pan-EU M&As market, which offers numerous benefits to companies deciding to proceed to cross-border mergers.

137 138

Case C-411/03 SEVIC Systems AG EU:C:2005:762. Truli (2016), p. 23.

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Acknowledgements This research is financed by the Republic of Cyprus through the Research Promotion Foundation (Research Project: “Takeovers and Mergers in European, Cypriot and Greek Company Law” KOULTOURA//ΒΡ-ΝΕ/0514/18).

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Thomas Papadopoulos is an Assistant Professor of Business Law at the Department of Law of the University of Cyprus. He received a degree of DPhil in Law (2010), a degree of MPhil in Law (2007) and a degree of Magister Juris-MJur (2006) from the Faculty of Law, University of Oxford, UK. He also received his LLB with Distinction (ranked 1st) from the Department of Law, Aristotle University of Thessaloniki, Greece (2005). Previously, he was a visiting researcher at Harvard Law School (2009–2010). He is also a Visiting Professor at International Hellenic University and an Attorney at law (Greece). Moreover, he is an Editorial Secretary of European Company Law (ECL) Journal. He was awarded the “Cyprus Research Award-Young Researcher (2014)” of the Research Promotion Foundation of the Republic of Cyprus (category of ‘Social Sciences & Humanities’). This distinction was awarded on the basis of his research on Takeovers and Mergers and was accompanied by a research grant. He is the Project Coordinator of the Research Project “Takeovers and Mergers in European, Cypriot and Greek Company Law”, which is financed by the Research Promotion Foundation of the Republic of Cyprus. His articles were published in many top international law journals.

The Implementation of the Cross-Border Mergers Directive in Italy: An Overview with a Critical Assessment of Dissenting Shareholders’ Appraisal Sergio Gilotta

1 Introduction The 2005 European Cross-Border Merger Directive,1 now replaced by Directive (EU) 2017/1132,2 (hereinafter “the Directive”) has been implemented in Italy in 2008, more than 2 years after the enactment of the 2005 Directive, with the Legislative Decree 30 May 2008, n. 108 (hereinafter “the Decree”).3 Contrary to what increasingly happens when it comes to implementing new European legislation, the intervention was not limited to a mechanical transposition of the provisions of the Directive. The Decree made some significant adjustments to perceived weaknesses of the Directive and made use of the regulatory options it left open. The Decree expanded the scope of the harmonized regime, by extending its application to types of companies that the Directive did not cover. Notably, the Italian legislator also exploited the option offered by art. 121, para 2, of the

1 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. 2 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017, relating to certain aspects of company law. The directive is a “codification” directive that groups in a coherent and orderly fashion a number of company law directives that have been amended several times (see Preamble para. 1). As such, it makes no substantive changes to those directives. References to “the Directive” throughout the text must be intended as made to the 2017 codification directive. 3 Implementation thus occurred after the relevant deadline (15 December 2007) expired. See art. 19 of the 2005 Directive.

S. Gilotta (*) University of Bologna, Department of Legal Studies, Bologna, Italy e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_18

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Directive,4 and provided specific protection to the company members who dissented from the merger, granting them a special appraisal right. Italy was among those jurisdictions where cross-border mergers were explicitly permitted also before the implementation of the Directive. Art. 25, para. 3, of the Law 31 May 1995, n. 218 establishes that “mergers of entities having their seat in different States are effective only if carried out in accordance to the laws of those States.”5 In establishing this general requirement, the rule implicitly (but univocally) admits the possibility of undertaking cross-border mergers under Italian law.6 The Directive provides for a general regulatory framework for cross-border mergers that integrates, rather than substituting, national merger laws.7 This principle is set out in Art. 121, para 1(b). The rule establishes that “a company taking part in a cross-border merger shall comply with the provisions and formalities of the national law to which it is subject” “[s]ave as otherwise provided in this [Directive]”.8 The limited harmonization provided by the directive leaves large leeway to national legislations. That leeway, in turn, might generate conflicts of laws.9 Italy’s implementing measures addressed this problem with a conflict-of-laws provision, establishing that in case of conflict between Italian law and the law governing one or more companies participating to the merger, the law of the company resulting from the merger prevails (art. 4, para 2, Decree).10 This article first provides a general overview of how the Directive has been implemented in Italy. It then turns to the protection afforded by Italian law to dissenting company members. It discusses how cross-border mergers may harm

4

Corresponding to art. 4, para 2, of the 2005 Cross-Border Mergers Directive. See Busani (2012), p. 661. 6 See Tola (2014), p. 580. Notably, in other European jurisdictions (e.g., Germany) cross-border mergers were not permitted before the Directive. 7 This is consistent with the idea of minimum harmonization: see Ugliano (2007), p. 597. 8 See Siems (2005), p. 174 (discussing such “basic principle” as formulated in the Commission’s Proposal. That formulation is slightly different from the one adopted in the final version of the Directive). 9 Note, however, that problems of inconsistency between national laws might be somehow mitigated by previous harmonization interventions in the area of merger law. For instance, a harmonized regime for mergers of public limited liability companies was provided by Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies (hereinafter “the third company law directive”, today incorporated, with other company law directives, into the codification Directive (EU) 2017/1132). Thus, at least as regards cross-borders mergers involving EU public limited liability companies, conflict-of-law problems should be largely resolved. See Dessì (2009), p. 185 (arguing that the Directive’s extensive reference to national laws is possible largely because the latter has been previously harmonized); Papadopoulos (2012), p. 524 (highlighting the role that the third company law directive played, together with the sixth company law directive on divisions, in paving the way for the introduction of a harmonized regime for cross-border mergers). 10 See Benedettelli and Rescio (2014), p. 603. 5

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minority shareholders and whether the special protections set forth by Italian law have a sound justification.

2 Scope of Application. Eligible Companies The Directive limits the application of the harmonized regime to limited liability companies11 “formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community”.12 It also requires that at least two of the companies involved in the merger are “governed by the laws of different Member States”13 (i.e., the harmonized regime does not apply to “domestic mergers”, involving companies regulated by the same national law). The Italian legislator set a broader scope of application for the harmonized regime. In addition to cross-border mergers between Italian limited liability companies and EU limited liability companies having their registered office, central administration or principal place of business within the Community, implementing rules apply also to cross-border mergers (a) involving companies different from a limited liability company, or in which the company resulting from the merger is not a limited liability company; (b) in which one or more of the participating companies or the company resulting from the merger are a limited liability company that does not have its registered office, central administration or principal place of business within the Community, provided that the national law of each company participating to the merger equally provides for the application of the Directive’s implementing regulation. Extension of the harmonized regime beyond the scope of the Directive has been justified by concerns of unjustified discrimination against companies—such as partnerships—that are fully entitled to use cross-border mergers as a means for the exercise of their freedom of establishment within the EU.14 Exclusion from the harmonized regime may as a matter of fact prevent those companies from carrying out cross-border mergers, as those companies would be exposed to increased difficulties and higher legal uncertainty when undertaking such transactions. Such an outcome may be regarded as contrary to the principle of equal treatment and ultimately to the freedom of establishment principle.15

The notion of a “limited liability company” is set out in art. 119(1). Art. 118. 13 Art. 118. 14 The European Court of Justice, in the Sevic case, did not distinguish between limited liability companies and other company types in affirming businesses’ freedom of establishment through cross-border mergers. See generally European Court of Justice (Grand Chamber), 13 December 2005, Case C-411/03, Sevic System AG. 15 See Benedettelli and Rescio (2014), pp. 601–602. 11 12

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Thus, by extending the harmonized regime to all companies for which freedom of establishment via a cross-border merger has been granted, the Italian legislator avoids discrimination across legal entities equally entitled to enjoy the freedom of establishment.

3 Common Draft Terms. Management and Expert Reports. Cash Payment As a first step of the whole cross-border merger process, the management bodies of each of the merging companies shall draw up the common draft terms of the merger. The terms contain both the information items required for domestic mergers16 and the special ones required for cross-border mergers.17 The Italian company participating to the merger must publish the common draft terms either in the commercial register in which it is registered or on its website, at least 30 days before the date of the general meeting called to approve the merger.18 By the same date, the additional information referred to in art. 123, para 2, of the Directive (e.g., the type, name and registered office of every merging company; the indication, for each merging company, of the arrangements made for the exercise of creditors’ and minority members’ rights) must be published in the national gazette. The management body of the Italian company participating to the merger shall draw up a report containing the information prescribed for domestic mergers. The report must explain and justify, from a legal and economic standpoint, the merger project and in particular the share exchange ratio, indicating the criteria followed for its determination and the valuation difficulties, if any, encountered.19 In addition to this information, the report must also indicate the consequences of the cross-border merger for the company’s members, creditors, and employees.20 In parallel to the preparation of the management report, one or more independent experts shall draw up a report in which they certify that the share exchange ratio is fair, indicating the methodologies that have been used and whether they are adequate, and highlighting any valuation difficulty encountered.21 Each company participating to the merger may appoint its own expert (or group of experts), or a common expert (or group of experts) may be appointed jointly by all participating companies. If the company resulting from the cross-border merger is a “società per azioni” (s.p.a.), a “società in accomandita per azioni” (s.a.p.a.), or a company regulated by the law of another Member State corresponding to such types, 16

See art. 2501-ter, para 1, civil code. See art. 6, para 1, Decree. 18 See art. 7, para 1, Decree, and art. 2501-ter, para 3 and para 4, civil code. 19 See art. 2501-quinquies, para 1 and 2, civil code. 20 See art. 8, para 1, Decree. 21 Art. 9, para 1, Decree, and art. 2501-sexies, para 1 and 2, civil code. 17

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the expert (or group of experts) shall be designated by the Court of the district in which the Italian company participating to the merger has its registered office.22 Where the Italian company participating to the merger has its shares admitted to trading on a regulated market, the expert must be a registered accounting firm.23 Both the management and the expert reports must be made available to the company’s members, either at the company’s registered office or through the company’s website, for a continuous period of at least 30 days preceding the general meeting called to approve the merger.24 The general merger definitions provided by both the third company law directive25 and the cross-border merger directive26 establish that in order to consider the transaction a merger, cash payments to the members of the companies participating to the merger may not exceed 10% of either the nominal value or (in the absence thereof) the accounting par value of the securities or shares issued by the company resulting from the merger. Nevertheless, the Directive admits the possibility that one or more national jurisdictions allow for a cash payment exceeding that threshold, establishing that the harmonized regime applies also to this case.27 Italy is among those jurisdictions that do not allow a cash payment exceeding the 10% threshold in domestic mergers.28 The Decree, however, establishes that a cash payment exceeding that threshold is admissible, provided that either the law of at least one of the companies participating to the merger or the law of the company resulting from the merger allows for a cash payment exceeding the threshold.29

4 Approval by the General Meeting Approval of the cross-border merger is a decision left to the members of each participating company, not to the company’s management organ. The role of the latter is to advance the merger proposal, draft the relevant terms, and execute, where adopted, the merger decision. Company members, to the contrary, retain the

22

Art. 9, para 2, Decree. Art. 9, para 1, Decree. 24 See art. 2501-septies, para 1, civil code. According to the same provision, additional documents, such as the annual financial statements of the last 3 years of each company participating to the merger shall also be made available to the members of the participating company. 25 See art. 89, para 1 and art. 90, para 1, of the Directive. 26 See art. 119(2)(a) and (b) of the Directive. 27 Art. 120(1) of the Directive. See Papadopoulos (2012), pp. 539–540 (highlighting the differences with the third directive and discussing the rationale of the rule); Rickford (2005), pp. 1402–1403 (for a detailed discussion of the rule). 28 See art. 2501-ter, para 2, civil code. 29 Art. 6, para 2, Decree. 23

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decision-making power over the operation. The common draft terms must thus be approved by the general meeting of each of the merging companies.30 If the Italian company participating to the merger is a limited liability company, this decision is adopted according to the rules and procedures set forth for charter amendments.31 These rules require higher quorums than those established for ordinary shareholder meetings.32 Instead, if the company participating to the crossborder merger is a partnership (an option explicitly allowed by Italian law: see infra Sect. 2), the merger decision is adopted when approved by the majority of the company’s members (calculated on the basis of each member’s share in the company’s profits).33 Dissenting partners, however, have the right to withdraw.34 Italy’s corporate law does not provide for employee participation to the company’s management. In the case the company resulting from the cross-border merger is regulated by the law of another Member State and the latter provides for employee participation, the efficacy of the merger approval by the Italian company participating to the merger may be made conditional upon the subsequent approval, through an ad hoc deliberation of the general meeting, of the arrangements regarding employee participation adopted in the company resulting from the merger.35 In case the law of one or more of the foreign companies participating to the merger provides for procedures for controlling and/or modifying the share exchange ratio, or for compensating dissenting shareholders, that do not prevent the registration of the cross-border merger, the general meeting of the Italian company participating to the merger must deliberate on the possibility that the members of the company to which those procedures apply actually make use of such procedures. In the case the company resulting from the merger is Italian, this deliberation becomes binding for the latter only if all other participating companies authorized the use of such procedures with the approval of the draft merger terms.36 The common draft terms are the result of intercompany negotiations conducted by the management bodies of each of the companies participating to the merger. As such, the terms cannot in principle be altered unilaterally by the general meeting of one or more companies (though the latter is the body that retains the decision-making power over the merger), unless all the other merging companies accepted the modifications. This is why the general meeting’s decision over a merger is usually an approve/reject deliberation, leaving no room for modifications that may affect the position of the other parties participating to the transaction.

30

See art. 126 of the Directive. Art. 2502, para 1, civil code 32 See art. 2369, art. 2369 and art. 2479 bis, para 3, civil code. 33 Art. 2502, para 1, civil code. The provision derogates to the general partnership law principle according to which decisions involving changes in the partnership contract (as mergers undoubtedly are) require unanimous consent by the company’s partners. 34 Art. 2502, para 1, civil code. 35 Art. 10, para 1, Decree. 36 Art. 16, para 3, Decree. 31

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Italian law conforms to this principle, allowing the general meeting of a company participating to a domestic merger to amend the common draft terms only to the extent the amendments “do not affect members’ or third parties’ rights”.37 For this provision to apply also in the context of a cross-border merger, it is required that the same amendments are approved by the members of all the other companies participating to the merger.38 The deliberation of the general meeting, together with the common draft terms, the management report, the expert report and other documents39 must be deposited for registration in the commercial register.40

5 Pre-merger Certificate The pre-merger certificate attests the legality of the procedure followed by the Italian company participating to the merger. It is issued by the notary public under request of the company and certifies: a) that the merger decision adopted by the general meeting has been registered in the commercial register; b1) that creditors’ opposition to the merger is no longer possible, because either the relevant deadline expired or the conditions to waive creditors’ right of opposition apply41; b2) alternatively to b1), that the Court before which the opposition has been raised established that the merger be executed notwithstanding creditors’ dissent42; c) in case the general meeting deciding upon the merger made the efficacy of the merger decision conditional upon approval of the conditions of employees’ participation,43 that such conditions have been approved; d) where applicable, that the general meeting decided on the possibility that the members of one or more participating companies make use of procedures for controlling and/or modifying the share exchange ratio, or for compensating dissenting shareholders, that do not prevent the registration of the cross-border merger44; e) that there are no impediments to the execution of the cross-border merger as regards the company;

37

Art. 2502, para 2, civil code. Art. 10, para 3, Decree. 39 The documents are listed in Art. 2501-septies, civil code. 40 See art. 2502-bis, civil code. 41 See Sect. 11. 42 See Sect. 11. 43 See Sect. 4. 44 See Sect. 4. 38

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The certificate must be issued “promptly”.45 However, in the case the law of the company resulting from the merger does not require the stipulation of the deed of merger, the certificate may be issued only after the deed has been stipulated by the notary public.46 Indeed, as pointed out in more detail in the next section, the deed of the merger is considered an essential procedural step that neither in domestic nor in cross-border mergers may be omitted.

6 The Deed of Merger As pointed out in the previous section, under Italian law the whole merger process must be concluded with the deed of merger.47 The deed must be registered in the commercial registers in which the companies participating to the merger and registered. After that, it must also be registered in the commercial register where the company resulting from the merger is registered.48 Only after all such registrations are executed the merger becomes effective.49 The deed is always required also in the case of a cross-border merger.50 If the company resulting from the merger is Italian, the deed will be stipulated by the Italian notary (the authority “competent to scrutinise the legality of the cross-border merger” in its final procedural steps, pursuant to art. 128, para 1, of the Directive) at the very end of the whole procedure, after the notary performed the final scrutiny of the legality of the merger.51 If the company resulting from the merger is not Italian, we must distinguish the case in which the law applicable to the resulting company requires the deed of merger from the case in which it does not (or in which the deed is not formally stipulated by a public authority such as the notary). In the former case the deed will be stipulated by the foreign competent authority. In the latter, the deed must be stipulated by the Italian notary. Stipulation will take place at an earlier stage of the merger process, before issuance of the pre-merger certificate.52 Thus, the deed of merger is required also in the case the law of the company resulting from the merger does not require it.53 As pointed out in Sect. 5, the legal mandate to stipulate the deed affects the time when the pre-merger certificate is issued.

45

Art. 11, para 1, Decree. Busani (2012), pp. 672–673. 47 Art. 2504, para 1, civil code. 48 Art. 2504, para 2, civil code. 49 Art. 2504-bis, para 2, civil code. 50 Art. 12, para 1, Decree. 51 Art. 13, para 1, Decree. 52 See art. 12 Decree. Busani (2012), p. 673. 53 See Benedettelli and Rescio (2014), p. 605. 46

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7 Scrutiny of the Legality of the Cross-Border Merger The Directive requires each Member State to designate an authority competent to scrutinize the overall legality of the cross-border merger for the case the company resulting from the merger belongs to its jurisdiction.54 The scrutiny focuses on the final steps of the procedure and complements the controls performed at an earlier stage (and at the single-company level) by the national authority in charge of issuing the pre-merger certificate. The Italian authority designated to perform such final scrutiny is the notary public, who is required to perform the scrutiny within 30 days after he or she has received from each of the participating companies the pre-merger certificate and the deliberation of approval by the general meeting.55 The notary is required to verify (a) whether the companies participating to the merger approved identical common draft terms; (b) whether all pre-merger certificates have been received and whether they certify, in accordance to the applicable law, the legality of the procedure followed by the participating company to which the certificate refers; (c) whether arrangements for employee participation in the Italian company resulting from the merger have been set up, according to what is established by art. 19 of the Decree. Once the scrutiny has been performed, the notary issues a certification attesting the legality of the cross-border merger.56

8 Registration of the Cross-Border Merger. Date in Which the Merger Takes Effect In the case the company resulting from the merger is Italian, the deed of the merger, the certification attesting the legality of the merger and the pre-merger certificates of the merging companies must be deposited within 30 days in the commercial register for registration. Registration takes place in the commercial register in which the company resulting from the merger is registered and in those in which each of the Italian companies participating to the merger are registered. The former registration may not precede the latter.57 In the case the company resulting from the merger is not Italian, within 30 days from the day the scrutiny of the legality of the merger has been performed by the designated foreign authority, the relevant certification and the deed of merger58 must

54

See art. 128 of the Directive. See Art. 13, para 1, Decree. 56 See art. 13, para 1, Decree. 57 Art. 14, para 1, Decree. 58 As pointed out in Sect. 6, the deed of merger is always required. 55

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be deposited for registration in the commercial register where the Italian company participating to the merger is registered.59 If the company resulting from the merger is Italian, the cross-border merger takes effect when the deed of merger has been registered in the commercial register of the place where the company has its seat.60 When instead the company resulting from the merger is not Italian, the date from which the merger takes effects is determined by the foreign law applicable to the company.61 Once the merger takes effect, all assets and liabilities of the companies participating to the merger are transferred to the company resulting from the merger.62

9 Validity of the Merger Once the cross-border merger takes effect according to the applicable law (see Sect. 8), it may no longer be declared void,63 meaning that there is no longer any possibility to undue the merger as a consequence of violations of law affecting the merger process. The rationale of the provision is to provide stability to the merger and with it to all contractual relations entered into by the company resulting from the merger after the transaction formally became effective. Indeed, the validity of such transactions could be endangered if the merger can be declared void after its formal completion. The ultimate goal is to enhance legal certainty, reducing transaction costs between the company resulting from the merger and those who transact with it. However, mergers carried out in violation of the law may harm members of the participating companies (e.g., in the case an unfair share exchange ratio has been established),64 creditors (e.g., creditors of firm A, a low-debt firm, may suffer a loss when the firm merges with B, a high-debt firm)65 and third parties more generally. Under Italian law, members of the participating companies and third parties who have been harmed by a merger executed in violation of the law are entitled to sue for damages.66 The rule applies to cross-border mergers as well.67

59

Art. 14, para 2, Decree. Art. 15, para 1, Decree. 61 Art. 15, para 3, Decree. 62 See art. 16, para 1, Decree, and art. 2405-bis, para 1, civil code. 63 Art. 17, para 1, Decree. 64 See Sect. 12. 65 See Sect. 11. 66 Art. 2504-quater, para 2, civil code. 67 Art. 17, para 2, Decree. 60

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Cross-Border Mergers Subject to Simplified Formalities

A simplified procedure, establishing several exemptions from important procedural steps required by the standard merger procedure, is set out for cross-border mergers by acquisition68 between a parent company and its subsidiary, when the former, being the acquiring company, owns a very large fraction of the shares of the latter. When the parent company owns all the shares (and other securities conferring the right to vote at general meetings) of the subsidiary, the latter, when an Italian company, is not required to approve the common draft terms.69 Furthermore, there is no need to establish a share exchange ratio and prepare the management and the expert reports.70 If the incorporating company is Italian, its charter may establish that the merger decision be adopted by the management organ, instead of the general meeting. However, members of the incorporating company owning at least 5% of the capital may request that the decision is adopted by the general meeting, according to the ordinary procedures.71 When the incorporating parent company owns at least 90% of the subsidiary’s shares (and other securities conferring the right to vote at general meetings), but not all of them, the management report, the expert report and the ad hoc financial statements required pursuant to art. 2501-quater of the civil code72 must be prepared only when either the law of the acquiring company or that of the acquired company so requires.73 In this regard, Italian law on domestic mergers establishes that such documents are not required when minority members of the merging subsidiary are offered the right to be bought out by the acquiring company at a fair price, as determined by the valuation criteria set out for appraisal.74 With a provision similar to the one set out for mergers by acquisition of whollyowned subsidiaries, the law of domestic mergers allows the acquiring parent company owning 90% (or more) of the subsidiary’s shares to adopt a charter provision providing that the merger decision is adopted by the company’s management organ, instead of the general meeting.75 Also in this case, however, members of the A cross-border merger by acquisition is defined as “an operation whereby [. . .] one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares” (art. 119(2)(a) of the Directive). 69 Art. 18, para 2, Decree. 70 Art. 18, para 1, Decree. 71 Art. 18, para 2, Decree. 72 Art. 2501-quater of the civil code mandates the management body of the companies participating to a domestic merger to prepare updated financial statements to be made available to the companies’ members. 73 Art. 18, para 3, Decree. 74 Art. 2505-bis, para 1, civil code. 75 Art. 2505-bis, para 2, civil code. 68

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incorporating company owning at least 5% of the capital may request that the decision is adopted by the general meeting.76 According to the general principle set out in art. 121, para 1(b), of the Directive (discussed in Sect. 1), the aforementioned provision should apply also to crossborder mergers (i.e., mergers between an Italian parent company and a 90%-owned subsidiary regulated by the law of another Member State).

11

Protection of Creditors

Mergers may harm creditors of one or more participating companies. This is related to the very nature of the merger, conceived as the “operation whereby [. . .] one or more companies [. . .] transfer all their assets and liabilities” either to another existing company77 or to a newly formed one.78 The pooling of assets and liabilities of different legal entities may worsen the position of creditors of one or more participating companies.79 This typically happens when a company having few debts merges with a highly indebted one. When that occurs, creditors of the former are exposed to an increased risk that the surviving company will not repay the debt. Italy’s national rules offer specific protection against this risk. In domestic mergers, creditors of each participating company are allowed to oppose the merger, i.e. to block its execution through an ad hoc judicial procedure.80 Opposition may be exercised within 60 days since the last of the required registrations has been carried out. Within that time-frame the merger may not be executed, unless (i) creditors gave their consent to the merger; (ii) dissenting creditors have been paid or the relevant sum has been deposited in a bank; (iii) an independent audit firm, jointly appointed on behalf of all participating companies as the expert required to assess the fairness of the share exchange ratio, attested that the patrimonial and financial situation of the companies participating to the merger does not require specific safeguards in favor of creditors. The court before which opposition has been raised, on its part, may dispose that the merger be executed notwithstanding creditors’ dissent if it finds that the merger poses no risks for creditors or if the company offers proper guarantees. The rule applies also to cross-border mergers involving Italian companies, pursuant to the aforementioned general principle according to which “a company taking part in a cross-border merger shall comply with the provisions and formalities

76

Art. 2505-bis, para 3, civil code. Art. 119(2)(a) of the Directive. 78 Art. 119(2)(b) of the Directive. 79 See Raaijmakers and Olthoff (2008), p. 305. 80 See art. 2503, civil code. Individual bondholders may also oppose the merger, unless the majority of them approved the merger through a deliberation of their special meeting. See art. 2503-bis, para 1, civil code. 77

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of the national law to which it is subject”,81 and to the more specific rule establishing that the abovementioned “provisions and formalities [. . .] shall, in particular, include those concerning the decision-making process relating to the merger and, taking into account the cross-border nature of the merger, the protection of creditors of the merging companies. . .”82 (italics added). Creditors’ opposition affects the content of the pre-merger certificate, which must attest that the opposition has not been raised or that the court before which it has been raised established that the merger be executed notwithstanding creditors’ dissent.83

12

Protection of Dissenting Members

The Directive allows Member States to introduce ad hoc measures for the protection of “minority members who have opposed the cross-border merger”.84 The rule is enabling, meaning that Member States may decide not to introduce any special measure. The provision has been the object of diffused criticism. Commentators argued that the reasons justifying such an enhanced protection are unclear85 and that the provision is in many respects obscure (e.g., it does not specify who qualifies as a “minority shareholder” entitled to receive special protection).86 Furthermore, the choice not to provide an harmonized regime of minority shareholder protection, leaving the selection and the design of the relevant measures to Member States, may increase transaction costs, decreasing the attractiveness of cross-border mergers.87 Italy is among those Member States which chose to provide special protection to minority members in cross-border mergers. In the case the company resulting from the merger is regulated by the law of another Member State, members of the Italian company participating to the merger who did not vote in favor of the merger have the right to withdraw (i.e., to have their shares or quotas reimbursed at a fair price). The procedure for the exercise of this withdrawal right (I will also refer to it as “appraisal”, using the two terms as synonyms) and the criteria for the valuation of the shares are those established for other withdrawal cases in that type of company.88 Withdrawal is an effective instrument for the protection of dissenting members in cross-border mergers. It provides an exit option at a fair price in case they disapprove the operation, i.e. when they consider it as capable of decreasing the value of their

81

Art. 121, para 1(b), of the Directive. Art. 121, para 2, of the Directive. 83 See Sect. 5. 84 See art. 121, para 2, of the Directive. 85 Wyckaert and Geens (2008), pp. 49–51. 86 Papadopoulos (2012), p. 538. 87 Kurtulan (2017), p. 116, reporting this view. 88 See art. 5, Decree. 82

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shares or quotas. Yet appraisal makes the merger process overall more burdensome89 and, at least with respect to some types of companies, it introduces a differential treatment with respect to domestic mergers that may be viewed as unjustified and discriminatory, and therefore ultimately contrary to the freedom of establishment principle.90 The next section offers a more detailed discussion of this issue, showing how such concerns are largely unwarranted.

12.1

Appraisal in Domestic Mergers

Under Italian law, dissenting members of a company participating to a domestic merger do not always have appraisal. In a “Società a responsabilità limitata” (s.r.l.) (limited liability corporation), members who did not express their vote in favor of the merger (i.e., who voted against it, abstained from voting or did not participate to the meeting) have the right to withdraw from the company in the case the merger is approved by the general meeting.91 Thus, as regards the s.r.l. the special appraisal right recognized for crossborder mergers does not introduce any material variation with respect to the regulation of domestic mergers. In both transactions dissenters have the right to withdraw. Similarly, members of private partnerships who did not give their consent to the merger have the right to withdraw.92 As a consequence, also with respect to these companies the establishment of an ad hoc withdrawal right for cross-border mergers93 does not introduce any differential treatment relative to domestic mergers. In a “società per azioni” (s.p.a.) (joint stock company), be it “private” or listed on a regulated stock exchange, shareholders who did not vote in favor of a domestic merger do not have appraisal as a general principle.94 Appraisal is granted only when the merger has specific features that trigger the application of other appraisal causes. Thus, at least with respect to the s.p.a., cross-borders mergers are treated differently from domestic ones. The former always triggers appraisal, the latter does not. This differential treatment, however, is more apparent than real. Under Italian law a cross-border merger involving an s.p.a. would have triggered appraisal also in the 89

See Bech-Bruun/Lexidale (2013), p. 69 (highlighting how paying compensation to dissenting shareholders might be very costly). 90 See Kurtulan (2017), p. 104. 91 Art. 2473, para 1, civil code. 92 Art. 2502, para 1, civil code. 93 As pointed out in Sect. 2, the implementing regulation applies also to private partnerships participating to a cross-border merger, provided that the national law of the other participating companies equally provides for the application of the harmonized regime. 94 Mergers are not listed among the decisions that trigger appraisal in an s.p.a. See art. 2437, civil code.

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absence of an ad hoc withdrawal right, such as that established in the implementing regulation. Under Italian law, withdrawal is always granted to shareholders of an s.p.a. who did not vote in favor of the merger (a) when the company transfers its registered office abroad95; (b) when the company undertakes a transformation (i.e., a change of the company type)96; (c) when the company changes the criteria for determining the value of the shares in case of shareholder withdrawal.97 All are mandatory withdrawal causes, meaning that they cannot be excluded through an ad hoc charter provision. Cross-border mergers in which the company resulting from the merger is governed by the law of another Member State are transactions that by definition entail a transfer abroad of the company’s seat and in all likelihood also a transformation of the company’s type (so long as the concept of transformation is intended broadly, as encompassing also any mutation in a company’s governing law)98 and a change in the criteria for the valuation of shares in case of withdrawal.99 Thus, such transactions would have triggered appraisal also in the absence of a specific provision such as the one set out in art. 5 of the Decree.100 As a consequence, the latter does not introduce any additional protection (or burden, depending on which perspective is adopted—whether that of the dissenting minority or that of the majority) unavailable under ordinary domestic merger regulation and may not be considered, per se, as the source of any differential treatment. Cross-border mergers of an s.p.a. would have been treated differently from domestic ones also in the absence of the aforementioned provision. The former would have automatically triggered appraisal, the latter would have not.

12.2

How Cross-Border Mergers May Harm Dissenting Members

We now turn to the question whether granting appraisal to dissenting shareholders in cross-border mergers is justified at all, in light of the protective measures that merger law already establishes in favor of them. However, in order to answer this question we must first understand how a cross-border merger may harm shareholders. A cross-border merger may harm shareholders either directly, as a consequence of the transaction itself and of how it is structured, or indirectly, as a consequence of the change in the applicable law that the transaction entails. I start from the latter case and then turn to the former. 95

Art. 2437, para 1, c), civil code. Art. 2437, para 1, b), civil code. 97 Art. 2437, para 1, f), civil code. 98 See Ventoruzzo (2007), p. 69. 99 Ventoruzzo (2007), pp. 69–70. 100 See Ventoruzzo (2007), p. 69; Wyckaert and Geens (2008), p. 44. 96

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a) Cross-border mergers may be used to move to a jurisdiction where minority shareholders receive lower protection vis a vis managers and/or controlling shareholders101 (be it because of the absence of adequate legal measures for shareholder protection, because of poor enforcement of existing measures, or because the legal system conforms to principles that are at odds with the protection of minority interests in a company). Once the company’s seat has been moved abroad, controllers are free to enjoy larger private benefits of control,102 to the detriment of minority shareholders who will see the value of their shares decrease. To be sure, in an ideal world of perfect EU company law harmonization minority shareholders would mostly be indifferent to the transfer of the company’s seat across EU jurisdictions, as they would invariably enjoy the same degree of protection across all EU jurisdictions. However, real-world harmonization is far from perfect: first, it is only partial, as it covers only specific areas of corporate law. Large parts of the corporate law landscape are still regulated by national law and some of them (e.g., directors’ liability) are key to the protection of minority shareholders.103 Second, there is still significant variance across Member States in the strength and efficacy of the enforcement of minority shareholder rights.104 Accordingly, transfer of the company’s seat matters for minority shareholders.105 Controllers may strategically exploit the freedom of establishment granted by EU law in order to reincorporate the company in a legal system where it would be easier for them to extract private benefits of control. This is a form of regulatory arbitrage where the choice of company law is not driven by the will to benefit shareholders as a class, but by the will to benefit either managers to the detriment of shareholders as a class or controlling shareholders to the detriment of minority shareholders. It is also worth stressing that decreased shareholder protection may not necessarily be the result of an opportunistic incorporation in a jurisdiction offering “low(er)-quality” corporate law. It may be also an almost automatic effect of each and every decision implying a change in the applicable law. Exercising shareholder rights is likely to be more difficult abroad than at

101 See Papadopoulos (2012), p. 537 (the change in the applicable law following a cross-border merger “could diminish the protection enjoyed by the shareholders hitherto”). 102 Private benefits of control are defined as the “pecuniary or non pecuniary gain that a shareholder acquires through use of its controlling position, and which is not shared with [other] shareholders”: Gilson and Schwartz (2013), p. 161. This chapter is mostly concerned with pecuniary private benefits, as they entail a wealth diversion from minority shareholders to controlling shareholders. 103 See Kurtulan (2017), pp. 111–113. 104 But see Ventoruzzo (2007), p. 60 (“it would be difficult to deem a change of applicable company laws within the European Union to lower significantly the protections of minority shareholder, and therefore be abusive, also in the light of the existing degree of harmonization among different European countries in company law”). 105 Kurtulan (2017), p. 112.

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home, because of linguistic barriers, poor knowledge of the foreign legal system, less information about the company’s activity due to increased geographical distance.106 Even a high-quality legal system, usually offering effective protection to minority shareholders, may be less effective in this respect when the latter are mostly located abroad. b) Cross-border mergers—like domestic ones—may be used as “tunneling” techniques107 through which controlling shareholders may divert value to their pocket at the expense of minority shareholders. In such a case, it is the merger transaction in itself—not the ensuing change in the applicable corporate law— that harms minority members. Only “controlled” mergers, like parent-subsidiary mergers or mergers between companies subject to common control by a dominant shareholder (e.g., those between two “sister” companies in a group), may be used to this purpose. Arm’s length mergers do not display such potential for self-dealing. Indeed, the companies involved in such mergers are independent from each other, so the transaction is in principle free from conflict of interest. In a controlled merger, controllers sitting at both sides of the transaction could set the share exchange ratio at their own convenience.108 Typically, the share exchange ratio will be set in a way that assigns minority shareholders a disproportionately small interest in the company resulting from the merger, to the advantage of the controlling shareholder who will get a larger share in the pie after the merger is executed.109

See Kurtulan (2017), p. 106 (stressing the “increased difficulty in invoking shareholder rights due to unfamiliarity with the new jurisdiction”); Papadopoulos (2012), p. 537 (pointing out more in general how a change in the applicable law “could make more difficult the exercise of shareholders’ rights”). 107 See e.g. Atanasov et al. (2011) (for a general account of the phenomenon and how it is treated under US law). 108 Note that under EU law companies participating to a cross-border merger have limited freedom in this respect. The exchange ratio, initially set by the participating companies’ management bodies, has to be checked by an independent expert who must attest its fairness (see Sects. 3 and 12.3). Of course, this is not to say that in the EU controlled mergers are immune from self-dealing. The expert intervention has its own limits and may not always be effective in protecting minority shareholders (see Sect. 12.4). However, the expert check on the fairness of the exchange ratio should at least reduce the risk of egregiously unfair transactions. 109 In the U.S., the highly conflicted nature of such transactions, coupled with their high exploitative potential, has prompted Delaware judges to develop ad hoc protections for minority shareholders. Such transactions are subject to enhanced judicial scrutiny (so called “entire fairness” test), unless specific procedural safeguards are put in place (a committee of independent directors is appointed and vested with the power to negotiate the merger and approve the terms of the transaction; a majority of minority shareholders approved the transaction). See Armour et al. (2017), p. 189. 106

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Measures of Minority Members’ Protection in Merger Law

The previous section showed that cross-border mergers may harm minority shareholders and explained how this could happen. Yet we still do not know whether providing dissenting shareholders with an ad hoc appraisal right is justified. The regulation of cross-border mergers features several instruments of minority shareholder protection. These instruments may already afford minority shareholders an adequate level of protection. One of those instruments, likely the most important, is the independent expert’s assessment of the share exchange ratio.110 The expert assessment provides a check on the fairness of the exchange ratio, curbing the risk of managerial error and, more importantly, controller opportunism in the determination of the exchange ratio.111 Other measures of minority shareholder protection are contained in the national rules governing the merger process. A common one is the requirement of a supermajority vote to approve the merger.112 In Italy, for instance, a 2/3 supermajority is required when the merging company is a publicly-traded società per azioni.113 Supermajority makes it more difficult for controlling shareholders to approve the merger and gives minority members veto power over the transaction. That veto, in turn, may be used to block transactions that the minority considers unfair, and to negotiate better deal terms (a power that is especially useful in controlled mergers in which the controlling shareholder, sitting at both sides of the table, cannot be considered a reliable bargaining agent of all shareholders). Dissenting shareholders may also challenge the validity of the merger resolution, whereas it has been adopted in violation of the law.114 In Italy, the concept of a “violation of law” in relation to the adoption of a shareholder resolution is intended very broadly, so it may easily encompass also the wrongful application of the criteria governing the determination of the share exchange ratio. Thus, a failure of the ex ante protections—e.g., the expert check on the fairness of the exchange ratio—may be remedied ex post through the right to challenge the validity of the merger resolution.115

110

See Sect. 3. See Rickford (2005), p. 1408 (pointing out the anti-dilution purpose of the expert report). See also fn 108 and 109 and accompanying text. 112 Ventoruzzo (2007), p. 59. 113 See art. 2368, para 2, and art. 2369, para 3 and 7, civil code. 114 See art. 2377, para 2, civil code. 115 The availability of this remedy is limited, however: see fn 116 and Sect. 9 more generally. 111

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Finally, when the validity of the merger may no longer be challenged,116 dissenting shareholders harmed by the merger still retain the right to sue for damages.117

12.4

Is Additional Protection Justified?

As the preceding section highlighted, the regulation of cross-border mergers contains several measures of shareholder protection. Adding a further layer of protection—in the form of an ad hoc appraisal right in favor of dissenting shareholders— may appear redundant. A convincing argument in favor of the opposite idea hinges on the limits that ordinary measures of shareholder protection provided by merger law—first and foremost the expert’s check on the fairness of the exchange ratio—encounter in the context of cross-border mergers. Section 12.2 showed that cross-border mergers may be used as a technique for forum shopping.118 Controllers may make an opportunistic use of the freedom of establishment granted by EU law and use a cross-border merger to move the company to a jurisdiction in which extracting private benefits of control is easier. Once the transaction has been accomplished and the company changed its applicable law, controllers will start diverting to their pockets a larger fraction of corporate wealth, as a consequence of the choice of a regime that tackles that behavior less effectively. The expert check on the exchange ratio provides no protection against such risk, since the valuation techniques used by the expert in assessing the fairness of the exchange ratio usually do not take into account—and properly discount—minority shareholders’ increased exposure to controllers’ abuse following reincorporation in a jurisdiction that makes such abuses easier. Put differently, the expert’s valuation techniques do not provide for a “bad law” discount. When the company is merged into a shell entity incorporated abroad (as is usually the case when reincorporating abroad is the sole purpose of the merger), the expert intervention will usually make sure that minority shareholders will receive shares in the new company exactly in the same proportion as those held in the merging company. Minority shareholders would thus be forced to accept shares that perhaps correctly represent their interest in the new company, but are worth less to them relative to their previous holdings, because of the increased exposure to controllers’ self-dealing.

116

According to Italian law (see art. 17, para 1, Decree, discussed in Sect. 9), once the cross-border merger has taken effect according to the applicable law (under Italian law, after the deed of merger has been registered in the commercial register: see Sect. 8), it may no longer be declared void. 117 See Sect. 9. 118 The cross-border merger has been effectively used to this purpose in an important case involving a large Italian firm. In 2014 the long-lived carmaker Fiat (now named FCA—Fiat Chrysler Automobiles—after the acquisition of the American carmaker Chrysler) merged with a wholly owned Dutch subsidiary. The transaction had no other motivation than that of reincorporating in the Netherlands. See generally Pernazza (2017); Kurtulan (2017), pp. 114–116.

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The other measures of shareholder protection recalled in Sect. 12.3 either do not apply or afford only limited protection. Minority shareholders of a company opportunistically reincorporating where shareholder protection is weaker may not challenge the validity of the merger resolution, since the latter shows no violation of law (in particular, there has been no formal violation of law in the determination of the share exchange ratio). For largely the same reasons, it would be hard for them to successfully sue for damages, as courts usually require showing a violation of law in order to award damages. Supermajority requirements at the shareholder meeting called to approve the merger do not always apply119 and when they do they may be ineffective, as when the controlling shareholder owns enough shares to reach the supermajority threshold or when collective action problems on the part of minority shareholders prevent them to aggregate enough votes to block the resolution. Accordingly, to award dissenting shareholders the right to withdraw when, as a consequence of the merger, the company’s seat will be relocated abroad does not appear to be redundant, as appraisal would offer protection in a scenario in which the other remedies provided by merger law might not offer adequate protection.

References Armour J, Enriques L et al (2017) The anatomy of corporate law: a comparative and functional approach, 3rd edn. Oxford University Press, Oxford Atanasov V, Black B, Ciccotello CS (2011) Law and tunneling. J Corp Law 37(1):1–49 Bech-Bruun/Lexidale (2013) Study on the application of the cross-border mergers directive. http:// ec.europa.eu/internal_market/company/docs/mergers/131007_study-cross-border-merger-direc tive_en.pdf Benedettelli MV, Rescio GA (2014) Note on cross-border mergers and divisions within the EU in the context of the consultation launched by the European Commission. Riv dir soc, pp 600–605 Busani A (2012) La fusione transfrontaliera e internazionale. Società, pp 661–674 Dessì R (2009) Le fusioni transfrontaliere. Riv dir comm 107(1–3):171–211 Gilson RJ, Schwartz A (2013) Constraints on private benefits of control: ex ante control mechanisms versus ex post transaction review. J Inst Theor Econ 169:160–183 Kurtulan G (2017) Minority shareholder protection in cross-border mergers: a must for or an impediment to the European single market? Eur Bus Org Law Rev 18(1):101–121 Papadopoulos T (2012) The magnitude of EU fundamental freedoms: application of the freedom of establishment to the cross-border mergers directive. Eur Bus Law Rev 23(4):333–453 Pernazza F (2017) Fiat Chrysler Automobiles and the new face of the corporate mobility in Europe. Eur Com Fin Law Rev 14(1):37–72 Raaijmakers GTMJ, Olthoff TPH (2008) Creditor protection in cross-border mergers: unfinished business. Eur Com Law 5(6):305–308

119

In Italy, for instance, a merger of a privately-held s.p.a. may be approved by a simple majority, provided that the votes cast in favor of the deliberation represent more than half of the company’s capital (see art. 2368, para 2 and art. 2479-bis, para 3, civil code). Similarly, the merger of an s.r.l. may be approved with the vote of at least half of the company’s capital (art. 2479-bis, para 3, civil code).

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Rickford J (2005) The proposed Tenth Company Law Directive on cross border mergers and its impact in the UK. Eur Bus Law Rev 16(6):1393–1414 Siems MM (2005) The European Directive on cross-border mergers: an international model? Colum J Eur Law 11:167–185 Tola M (2014) La fusione transfrontaliera. In: Serra A, Demuro I (eds) Trasformazione, fusione, scissione. Zanichelli, Bologna, pp 579–619 Ugliano A (2007) The new cross-border merger directive: harmonisation of European Company Law and free movement. Eur Bus Law Rev 18(3):585–617 Ventoruzzo M (2007) Cross-border mergers, change of applicable corporate laws and protection of dissenting shareholders: withdrawal rights under Italian Law. Eur Com Fin Law Rev 4(1):47–75 Wyckaert M, Geens K (2008) Cross-border mergers and minority protection: an open-ended harmonization. Utrecht Law Rev 4(1):40–52

Sergio Gilotta is Lecturer in Business Law at the University of Bologna, where he teaches business law and securities regulation. He holds a Ph.D. in Corporate Law and Financial Markets Regulation from the University of Bologna and an LL.M. from Harvard Law School. Before joining the Law School in 2012, he taught international commercial law at the School of Economics of the University of Bologna and has been Research Fellow at the University of Florence. His research interests range from comparative corporate law to financial markets regulation, and include topics such as corporate disclosure, insider trading, takeovers, and corporate groups.

The Implementation of the Cross-Border Mergers Directive in Luxembourg Isabelle Corbisier

1 Introduction and Context 1.1

Luxembourg’s Openness to Corporate Restructuring Schemes Including Cross-Border Mergers (CBM)

Luxembourg is a jurisdiction that is very open to the idea of corporate restructuring schemes across the borders (there is generally no issue with corporate moves, inside or outside Luxembourg). This situation is not surprising considering Luxembourg’s status as an international financial centre (Conac 2011, p. 63). Belgian law— company code and case law1—being historically the main source of inspiration of Luxembourg company law, it also exercised some influence on the adoption of Luxembourg’s legal provisions dealing with (cross-border) merger and divisions (Corbisier 2011, pp. 27–58). But even before the transposition of the CBDM and even in the absence of any specific legal provisions on this topic,2 cross-border mergers were already

1 We are of course referring to Belgian law as it existed between 1873 and 2019. In February 2019, the Belgian Parliament adopted a brand new company law codification that appears to more closely inspired from Dutch law whereas the main source of inspiration of Belgian Company Law was previously grounded in French law. As a result, the Luxembourg Company Law Legislation might find itself in a situation of having to evolve in a more autonomous fashion. 2 Such specific provisions did not exist before 2007, the transposition of the CBMD intervening only in 2009.

I. Corbisier (*) University of Luxembourg, Luxembourg City, Luxembourg e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_19

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practiced in Luxembourg however with a certain amount of uncertainty in practice.3

1.2

The Three Waves/Generations of CBM

In recent history, one can distinguish three waves or generations of CBM (Spang 2011, pp. 84–87). The first wave of CBM took place in the nineties, following the transposition of the directive 90/434/CEE (1990) (on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different member states), at a time when only internal mergers between public limited liability companies were expressly regulated in Luxembourg (since 19874). Practice was based on unanimous shareholders decision,5 absence of or agreement of the creditors and absence of employees in the companies involved in the transaction. The second big wave of CBM took place during the 2001–2007 period, following the adoption of the European Company (SE) regulation (No 2157/2001. of 8 October 2001). Such adoption was interpreted as a signal given at EU level in favour of CBM.6 As a consequence, more CBM took place without unanimous shareholders decision7 and without the certainty of the agreement of all the creditors. The Sevic CJEU decision (Dec. 13, 2005, C-411/03, EU:C:2005:762), that involved the merger by acquisition of a Luxembourg company by a German company, strengthened the opinion that CBM were now firmly accepted at EU level, even if uncertainty still applied to its procedural aspects.

3 Similarly cross-border transfers of the seat from and to Luxembourg with change of applicable law are frequently practiced in Luxembourg, the recent Polbud decision of the CJEU (ECLI:EU: C:2017:804) standing as an illustration thereof (transfer of the seat of a Polish company to Luxembourg). See Corbisier (2018), pp. 33–39. 4 At the time, the only European Directive existing on the topic was the so-called “Third Directive” (78/855/EEC) that concerned (internal) mergers of public limited liability companies. As Luxembourg’s policy for transposing EU directives can be summarized with the motto “all of the directive but only the directive” (in other words: no gold-plating), said transposition only addressed the regulation of internal mergers between public limited liability, whereas other jurisdictions (like Belgium, for instance) took the opportunity of such transposition to extend the possibility of merging to other types of companies or legal persons. 5 At the time Luxembourg company law still demanded shareholders’ unanimous consent for a change of the company’s nationality and there was such change when the company that was acquired in the course of a merger with a foreign company was a Luxembourg company. 6 As this regulation formulates a procedure that allows the transfer of the statutory seat of the SE with subsequent change of the (national) law applicable to the SE on a subsidiary basis. 7 And this at a time when Luxembourg company law still demanded shareholders’ unanimous consent for the change of the company’s nationality. The law changed on that matter (allowing such change at a qualified majority that also would apply to the company’s transfer of the seat) only in 2016 (Law of 10 August 2016).

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The third wave of CBM followed the 2009 company law reform (Law of 10 June 2009) that transposed the 2005 CBMD and provided legal certainty in terms of procedural rules to be followed. In practice, it appears that most CBM involve the acquisition of a foreign company by a Luxembourg company (fewer involve the acquisition of a Luxembourg company by a foreign company), most are intra-European, generally involve public or private limited liability companies and most concern companies that are already part of a (same) group of companies (Spang 2011).

1.3

The Elements Defining the Openness of Luxembourg’s Legislation Relating to CBM

Luxembourg is famous for being a quite liberal and pragmatic jurisdiction. Such observation applies to the regulation of CBM as well. First of all, Luxembourg did not exercise the option allowing national authorities to oppose a merger (internal or cross-border merger) on grounds of public interest (see art. 4, 1, b) CBDM and art. 121, 1, b) dir. 2017/1132 of June 14th, 2017 relating to certain aspects of company law, codifying EU company law directives including the ones relating to national and cross-border mergers). A widespread attitude in Luxembourg it to welcome the immigration of companies. However, the belief is that one of the reasons that made for the success of Luxembourg is that once companies migrated to Luxembourg, nothing will be undertaken to “trap” them within. Furthermore, since 2007, national and cross-border mergers are allowed when one of the companies involved is the subject of bankruptcy proceedings, proceedings relating to composition with creditors or a similar procedure, such as suspension of payments, controlled management or proceedings instituting special management or supervision (see art. 1020-1 and 1030-1 Law on Commercial Companies, LCC). Additionally, cross-border mergers are allowed and regulated for all companies enjoying legal personality (civil or commercial, including: public and private limited liability companies, partnerships and limited partnerships, partnerships limited by shares, simplified joint stock companies—SAS—and cooperative societies, Economic Interest Groupings—EIG—being also covered) according to the principles formulated in the EU Cross-Border Mergers Directive. Moreover, the same legal principles are also declared to be applicable to cross-border mergers involving companies originating in a state that is NOT a member of the EU (provided that the other state’s national law does not preclude it) (see art. 1020-1 LCC).8

8 It is however recognized that non-EU international mergers raise more practical difficulties than CBM within the EU: f.e. will there be some national authority that will be competent and willing to deliver the certificate attesting to the legality of the process in the other non-EU state? (Conac 2011, p. 78).

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Cross-border mergers (European and international) thus appear to be regulated within the same legal provisions as the national mergers. What about other cross-border transactions? These are also welcomed in Luxembourg’s legislation albeit with less detail considering the lack of EU rules on this topic.9 Hence, Cross-border divisions (within the EU and also with a company/EIG originating in a state that is not a member of the EU) are permissible from the point of view of Luxembourg but, as no EU directive applies to the topic, does not receive any specific regulation relating to the procedure to be followed (see art. 1030-1 LCC). Partial divisions are also admitted from the point of view of Luxembourg but are not specifically regulated either (see art. 1030-3 (1) LSC). Finally, the law of Luxembourg also recognizes that the following transactions may be carried out with a foreign actor (European or non-European, provided that the latter’s national law does not preclude it) : transfers of professional assets (originally inspired from Swiss law, see art. 1050-1, sub-§ 3 LCC); partial transfers of assets (by reference from art. 1040-2 LCC); transfers of a branch of activity (by reference from art. 1040-3 LCC) and transfers of all assets and liabilities (by reference from art. 1040-4 LCC).

2 Specifically Relating to the Implementation of the CBMD in Luxembourg Many cross-border mergers do take place in Luxembourg. Most practical difficulties in implementing the regime were solved in the first months/years following the transposition of the CBMD (2005) (the provisions of which were taken over in the recent company law codification operated in directive 2017/1132) that took place in 2009. As a matter of fact most of the CBM taking place in Luxembourg are of a rather uncomplicated kind as they are often intra-group mergers between companies with no or very few employees and, furthermore, in a vast majority of cases, between a parent company and its 100% subsidiary. Therefore the protection of employees or minority shareholders is not at stake and one can have recourse to the simplified merger procedure. For this reason, this topic, to our knowledge, did not give rise to disputes brought to Court. Moreover, most cross-border mergers involving a Luxembourg company are intra-European transactions but a few cases can be observed of mergers involving

9 Luxembourg being a small jurisdiction, it sometimes tend to rely on the legal technical resources residing in EU rules in order to develop more detailed legislations.

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non-European companies as well (Spang 2011, p. 83). Besides, almost all Luxembourg companies involved in a CBM are either public or private limited liability companies (SA or SàRL), the latter type of company being very appreciated from US multinational companies and private equity funds establishing subsidiaries in Luxembourg (Spang 2011, pp. 83, 86). Finally it is to be pointed out that the so-called “merger” between companies involved in different group of companies rarely takes place by directly using the merger procedure in the proper legal sense but is mostly first operated through the acquisition of shares or assets, the proper “merger” in the legal sense being carried out in the post-acquisition stage (Spang 2011, p. 84). In practice however, a few questions/issues were raised. First the lack of complete harmonization of delays can frustrate the parties’ expectations in terms of timing (f. e. art 6 (1) of the CBMD relating to the delay to be observed between the publication of the draft terms of the CBM and the date of the general meeting which is to decide thereon: in Luxembourg: 1 month, in Belgium: 6 weeks). What about mergers between companies that are not limited liability companies in the sense of the CBMD? Such mergers appear to be allowed following the CJEU Sevic decision (mentioned above) but since none of the EU directives addressing the topic cover such mergers, their legal regime remains uncertain. That could be somewhat problematic for Luxembourg that allows all companies with legal personality to merge and that experiences an undeniable revival for entities (Spang 2011, p. 88) such as limited partnerships (limited by shares or not) that are very much in use in the funds industry. . . The uncertainty surrounding mergers with bi-national companies: let us explain the situation with an example A Luxembourg company (the real seat theory applies in Luxembourg) is to merge with a company having its statutory seat in the Netherlands (the statutory seat theory applies in the Netherlands) and its real seat in Luxembourg. So the company is Dutch from Dutch point of view and Luxembourgish from Luxembourg point of view. The company is therefore is to be regarded as “bi-national”. Even though this merger could be viewed as a national merger from Luxembourg’s point of view, it will be usually treated like a cross-border merger for the sake of legal certainty (Spang 2011, pp. 89–90)

The simplified merger procedure brings a more than welcome simplification in the field of intra-group mergers but this procedure applies only when the parent company acquires its subsidiary and not to the case of the “reverse merger” where a subsidiary acquires its parent company (Spang 2011, p. 91). As this case is frequent in practice, some simplification would be welcome as well for these transactions. Still relating to simplified mergers, the CBDM requires an approval by the shareholders of the acquiring company whereas such requirement is not applicable to a national merger (provided that some conditions are satisfied) (Spang 2011, pp. 92–94). Is it actually useful to maintain such difference of treatment?

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The last difficulty to mention relates to a company law reform that was recently adopted in Luxembourg (2016), introducing, a.o., a new article 1865bis in the Civil Code that allows the so-called “dissolution-confusion” (also called a merger-dissolution or instantaneous dissolution) in one-shareholder companies. This new provision was inspired from French law (art. 1844-5 of the French Civil Code) and provides for the possibility (not an obligation), when the shares of any type of company find themselves concentrated within the hands of a single shareholder, for the single shareholder to proceed to the winding-up of the company followed by universal transfer of the company’s assets to said shareholder without going into a liquidation procedure. In this case the company’s creditors may, within a 30 days delay, go to court to request additional securities, the court being however entitled to reject such request if it considers either that the creditors already have sufficient collateral or that the (ex) shareholder’s assets are sufficient to meet his/her obligations towards said creditors (the protection is substantially the same as for a merger but the delay awarded to creditors is shorter than the one awarded by art. 1021-9 LSC: 2 months). The question can be raised whether this provision could be applied across the borders, i.e.: could a French company being the sole shareholder of a Luxembourg company decide to dissolve it without having to consider the provisions of the CBDM?

3 Beyond the CBMD: More Issues Relating to Companies’ Mobility Have to Be Addressed The directive only addresses mergers. Other reorganization techniques, such as divisions, transfers of assets, transfers of a branch of activity or of all the assets and liabilities of the company, are not covered by the directive and this even though they can likewise take place across the borders and can be difficult to carry out in the absence of some harmonized regime. Since 2016 in Luxembourg the cross-border merger is no longer the sole way for a company to change its nationality/applicable law without having to comply with some unanimity requirement. Indeed both the public and private limited liability companies can now decide to transfer their seat at the same qualified majority demanded for a (cross-border) merger but, nevertheless, no express procedural rules exist to date to regulate transfers of seat from and to Luxembourg.10 That of course adds to the arguments formulated so that the EU would finally harmonize the conditions at which the transfer of a company’s seat could be transferred, which is the approach currently endorsed by the EU with its company law package proposal (2018, still discussed) that, beyond the reform brought to the CBMD, also contains

10 This absence does not prevent such transactions from happening and some procedural steps were developed in practice: see Corbisier (2018), pp. 33–39; Corbisier and Bernard (2019), pp. 18–30.

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provisions relating to cross-border divisions and conversions (the latter term covering cross-border seat transfers).

4 Conclusion There is a quite intense practice of corporate restructuring schemes seeing companies migrating to Luxembourg where—aside from tax considerations and other extra corporate considerations—they will benefit from an environment that is generally favourable to majority shareholders (Corbisier 2016, pp. 151–156; Corbisier 2017, pp. 76–79). That type of environment can also be observed in the context of the CBM itself as Luxembourg does not offer special protection to minority shareholders in that context.11 The future will tell whether the present efforts in order to bring some reforms into the CBMD will change that situation or not. As noted above and also as pointed out by other reporters from other jurisdictions, the non-simplified merger procedure is not frequent in Luxembourg. Usually there will be transfers of shares, assets/liabilities, before a simplified merger would be carried out (Spang 2011, p. 84) as the legal risk and level of complexity implied in following the standard procedure are generally considered as too high. Moreover as the change of the company’s nationality (or applicable law) by cross-border transfer of the seat was recently made easier in Luxembourg (but however still with some uncertainties relating to the procedure to be followed, Corbisier (2018), pp. 33–39, it could be expected that some CBM that were carried out to the sole purpose of changing the law applicable to the company(ies) involved might recede in the future. Of course, beyond the various company law technical questions attached to the achievement of company mobility within Europe, other questions, sometimes of a highly political nature might affect the future of the various procedures available. Acknowledgements Author wishes to thank Mr. Jean-Paul Spang (jean-paul.spang@kleyrgrasso. com) for his precious insights from the practitioner’s point of view.

11 One of the present debates concerning the reform of the CBDM is to determine whether or not some protection of dissenting minority shareholders will be imposed in the future. At the moment it is not necessarily the case: see art. 127 (3) Dir. 2017/1132: “If the law of a Member State to which a merging company is subject provides for a procedure to scrutinise and amend the ratio applicable to the exchange of securities or shares, or a procedure to compensate minority members, without preventing the registration of the cross-border merger, such procedure shall only apply if the other merging companies situated in Member States which do not provide for such procedure explicitly accept, when approving the draft terms of the cross-border merger in accordance with Article 126 (1), the possibility for the members of that merging company to have recourse to such procedure, to be initiated before the court having jurisdiction over that merging company (. . .).” We know that that the proposal included into the Company Law Package aims at formulating some rules on that topic.

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References Books and Book Chapters Conac P-H (ed) (2011) Fusions transfrontalières de sociétés. Larcier, Bruxelles, 266 p, with contributions by P-H Conac (CBM in Luxembourg, 61–79), I Corbisier (Options taken for the transposition of the CBMD in France, Belgium and Luxembourg, 27–58), J-A Delcorde & Th Tilquin (CBM in Belgium, 169–231), F Guillaume(CBM in Switzerland, 233–255), M Menjucq (Presentation of the CBMD, 15–26), I Riassetto (UCITS’ CBM, 143–166), A Seifert (Protection of employees in CBM, 121–142), J-P Spang (CBM in Luxembourg from the practitioner’s point of view, 81–97) & J-P Winandy (Tax law treatment of CBM in Luxembourg, 101–120) Corbisier I (2011) Les options législatives prises par la Belgique, la France et le Luxembourg à l’occasion de la transposition de la directive “fusions transfrontalières.”. In: Conac P-H (ed) Fusions transfrontalières de sociétés. Larcier, Bruxelles, pp 27–58 Corbisier I (2016) L’actionnaire dans le cadre du projet 5730. In: Prüm A (ed) Cent ans de droit luxembourgeois des sociétés. Larcier, Bruxelles, pp 151–156 Spang J-P (2011) La fusion transfrontalière en droit luxembourgeois : regard du praticien. In: Conac P-H (ed) Fusions transfrontalières de sociétés. Larcier, Bruxelles, pp 81–97

Articles Corbisier I (2017) La réforme du droit luxembourgeois des sociétés. RPS-TRV (4):416–468. n 46–49, 76–79 Corbisier I (2018) Arrêt Polbud de la CJUE ou le Luxembourg à la croisée des chemins. Journ. des Trib. Luxembourg (56):33–39 Corbisier I, Bernard F (2019) Cross-border mobility within the EU and specifically in Luxembourg and Belgium: same destination, different roads. Eur Company Law 16:18–30

Further Reading Bernard F (2011) Les fusions transfrontalières au sein de l’Union Européennes. DAOR (1):5–58 Becker A (2013) La multiplication de la Société Anonyme Européenne (SE) en Allemagne et au Luxembourg. In: Dekeuver-Défossez F, Cotiga A (eds) La société européenne. Bruylant, Bruxelles, pp 29–48 Boone D, Piette C (2014a) Fusion et rétroactivité. JurisNews-Sociétés (7–8):275–282 Boone D, Piette C (2014b) Au salon du bricolage: transfert de siège transfrontalier inbound et rapport révisoral en droit comparé belge et luxembourgeois. JurisNews-Sociétés (5–6):267–274 Boone D (2015) Fusion-confusion: vade-mecum. JurisNews-Sociétés 8(7–8):311–318 Carvalho Moreira A (2016) Disssolution sans liquidation: les particularités de la TUP luxembourgeoise. JurisNews-Sociétés (4):331–336 Massard H (2012) Le transfert international de siège des sociétés en droit luxembourgeois. Pasicrisie luxembourgeoise (4):769–795 Steichen A (2017) Les nouvelles règles communes à l’ensemble des sociétés. In: Prüm A (ed) La réforme du droit luxembourgeois des sociétés. Larcier, Bruxelles, pp 249–289 X (2008) Les fusions transfrontalières. JurisNews-Sociétés (2):5–8

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X (2009a) Les fusions transfrontalières: une technique de restructuration désormais pleinement encadrée. JurisNews-Sociétés (6):69–72 X (2009b) Le mécanisme de dissolution-confusion: portée et risques du projet d'article 1865 bis du Code Civil issu du projet de loi 5730. JurisNews-Sociétés (2):53–56

Isabelle Corbisier is a Professor and co-director of the Master of Private European Law at the University of Luxembourg and a Guest Professor (Advanced Company Law) at the HEC School of the University of Liège. She previously was an attorney and later of counsel for Brussels major law firms. She obtained a LL.M degree from the Louisiana State University Law Center (USA) in addition to her Belgian law degree (Catholic University of Louvain) and obtained her PhD degree summa cum laude from the University of Luxembourg (Doyen Roger Houin Prize in France in 2014). She previously taught at various universities in Belgium, was a visiting scholar at the Universities of Berkeley (USA) and Rotterdam (The Netherlands) and a wissenschaftliche mitarbeiterin at the University of Würzburg (Germany).

Implementation of the Cross-Border Merger Directive in the Netherlands M. A. Verbrugh

1 Introduction The Cross-Border Merger Directive (CBMD)1 was implemented in the Netherlands in 2008. The Act amending Book 2 of the Dutch Civil Code (DCC) in connection with the transposition of the CBMD entered into force on 15 July 2008.2 Before that date, Dutch statutory law did not expressly deal with cross-border mergers and most legal scholars were of the opinion that cross-border mergers were not permissible.3 The Act introduced a new Chapter 3A on cross-border mergers and added a general provision on cross-border mergers in Chapter 1 of Title 7 of Book 2 DCC. In a crossborder merger both the provisions of Chapter 3A and the rules on domestic mergers apply.4

1 Although the CBMD has been codified with Directive 2017/1132, this contribution will refer to the CBMD. When it concerns specific Articles, however, reference will in most cases be made to the Articles in Directive 2017/1132. 2 Act of 27 June 2008, Bulletin of Acts, of 27 June 2008, no 260. Next to ten other Member States the Netherlands was too late with the transposition. 3 An exception was van Solinge (1994). After the Sevic-case (C-411/03) in 2005 and before the transposition of the CBMD in the Netherlands, cross-border mergers were possible in the Netherlands based on the freedom of establishment of Article 49 and 54 TFEU. See e.g. Court of Amsterdam (Kantonrechter), 29 January 2007, ECLI:NL:RBAMS:2007:BA3383. 4 The rules on domestic mergers can be found in Chapter 1 (General provision), 2 (General provisions regarding mergers) and 3 (Special provisions for mergers of public (NV’s) and private limited liability companies (BV’s)) of Title 7 Book 2 DCC.

M. A. Verbrugh (*) Erasmus University Rotterdam, Rotterdam, The Netherlands e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_20

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Since 2008 in total 779 cross-border mergers have been announced in the Dutch national gazette (Staatscourant).5 In 447 announcements a Dutch company was mentioned as the disappearing company, in 315 announcements the Dutch company was mentioned as the acquiring company.6 After an analyses of the implementation of the CBMD and the rules on crossborder mergers in the Netherlands in general, some specific Dutch characteristics on cross-border mergers will be analyzed, such as the possibility of an inbound triangular merger, the protection of creditors, minority shareholder protection and employee participation rights.

2 Scope Although all Dutch legal persons can be involved in a domestic merger,7 the scope for cross-border mergers is—in line with the CBMD—limited to companies with share capital.8 Article 2:308(3) DCC reads as follows: Furthermore, the present Title (Title 2.7) applies to a public limited liability company (‘NV’), a private limited liability company (‘BV’)9 and a European Cooperative Society that merges with a limited liability company10 or cooperative company incorporated under the law of another Member State of the European Union or the European Economic Area.11

A Dutch cooperative society cannot take part in a cross-border merger since it does not have a share capital structure.12

5 See Art. 2:333e DCC and par. 4 below for this publication requirement. When there are more merging companies with registered office in the Netherlands, they may comply with a joint publication (Art. 2:333e(2) DCC). No cross-border merger shows up at the Staatscourant for 2016. It is, however, not likely that no cross-border merger had taken place that year. On the other hand, the number of 789 includes several mergers within one group of companies. 6 In 17 announcements no information on this topic was provided. 7 As a limitation, Art. 2:310 DCC states that legal persons may (only) merge with legal persons of the same type. For the purpose of this Article, public and private limited liability companies are regarded as legal persons of the same type. 8 Other companies can be involved in a cross-border merger based on the freedom of establishment of Article 49 and 54 TFEU. See amongst others the Sevic-case (C-411/03). 9 See for both Dutch company types, often also translated as Open/Closed companies, Directive 2017/1132 Annex II. Although in practice almost all listed Dutch companies are public limited liability companies, most Dutch public limited liability companies are not listed. 10 See for the definition of a limited liability company, Art. 119 Directive 2017/1132. 11 See also Art. 2:333b DCC. According to Bech-Bruun & Lexidale (2013), p. 711, the definition of the Dutch national law is narrower than the respective one in Article 1 CBMD, for two reasons. Only one reason, however, is mentioned, and although the Dutch definition is shorter, it does not seem to be narrower. 12 Kamerstukken II (Parliamentary Papers II) 2006-2007, 30 929, nr. 3 (Explanatory Memorandum), p. 4/5.

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An NV or a BV may merge with a limited liability company which is formed under the law of another Member State of the EU or EEA. Furthermore, both Dutch companies may be the acquiring company in a merger between limited liability companies that are formed under the law of another Member State (Art. 2:333c (1) DCC). This last possibility does not follow from the CBMD. A European Cooperative Society (SCE) with its registered office in the Netherlands may merge with a cooperative company, which is formed under the laws of one or more other Member States. A European Cooperative Society with its registered office in the Netherlands may, furthermore, be an acquiring company in a merger between cooperative companies formed under the laws of one or more other Member States (Art. 2:333c(2) DCC). An NV that constitutes an open-ended investment institution can under certain circumstance be involved in a cross-border merger ((Art. 2:333c (4) DCC).13 Although not mentioned in the former Articles, also a Societas Europaea (SE) with registered office in the Netherlands can take part in a cross-border merger.14

3 Merger Forms: Mother-Daughter Merger, Sister Merger and Triangular Merger The Third Directive on domestic mergers15 as well as the CBMD contain two main forms of mergers: merger by the acquisition of one or more companies by another company and merger by the formation of a new company.16 Both Directives provide for simplified formalities for an acquisition of one company by another which holds 90% or more of its shares or other securities conferring voting right.17 The Dutch legislator has provided for more merger forms than both Directives, but has not implemented the simplified procedure (see par. 4 below) in case the acquiring

13

See Art. 2:334b(2) and 2:333c(4) DCC. Compare Art. 3(3) CBMD. See further van der Bijl and Oldenburg (2010), p. 229; Bech-Bruun & Lexidale (2013), p. 714. Because of an amendment in the definition of an open-ended investment institution in the Dutch Financial Supervision Act, the reference in Art. 2:334b(2) DCC to that act is no longer correct. See Asser/Maeijer & Kroeze (2015), nr. 458 and 426. 14 According to Art. 10 SE-Regulation, an SE shall be treated in every Member State as if it were a public limited-liability company formed in accordance with the law of the Member State in which it has its registered office. See for the scope further, Schutte-Veenstra (2010), pp. 411–422. 15 Although the Third Directive has been codified with Directive 2017/1132, this contribution will refer to the Third Directive. When it concerns specific Articles, however, reference will in most cases be made to the Articles in Directive 2017/1132. 16 Art. 88–90 and 119(2) Directive 2017/1132. 17 See Section 4, art. 110 and further Directive 2017/1132.

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company holds 90% or more but not all of the shares of the company being acquired.18 Next to the mother-daughter merger (Art. 2:333(1) DCC) the Dutch legislator has for domestic mergers also introduced the simplified procedure for sister-mergers. Art. 2:333(2) DCC) reads as follows: “if someone, or another person on his behalf, holds all shares in the capital of the merging companies, and the acquiring company does not allot shares under the notarial deed of merger, then Articles 2:326-2:328 do not apply.” In other words, for a sister- merger there is a choice for companies to allot shares or not and if no share are allotted, the simplified procedure can be followed. Dutch commentators argue that this can also be used in a cross-border sistermerger.19 Another Dutch merger form that does not follow from the Third Directive and the CBMD is the triangular merger. For domestic mergers Art. 2:333a(1) DCC reads as follows: The notarial deed of merger may provide that the shareholders of the disappearing companies become shareholders of a group company20 of the acquiring company. In such event these shareholders will not become shareholder of the acquiring company.

A triangular merger allows, for example, for a group company to acquire assets and liabilities from a company outside the (economic) group, without outside shareholders becoming shareholders within the group. If the mother company is listed on a stock market, this can also be attractive for the shareholders of the disappearing company.21 Article 2:333c(3) DCC facilitates a cross-border triangular merger for NV’s, SE’s and BV’s, provided that the acquiring company and the group company have their registered office in the Netherlands. In other words, only an inbound triangular merger is explicitly provided in Dutch law. Furthermore, the inbound triangular merger is only possible if the law(s) of the foreign disappearing company or companies allow the triangular merger.22 According to the Explanatory Memorandum, a triangular merger is also possible with a foreign mother company, provided that the law of the acquiring mother company allows the merger.23

18

See Schutte-Veenstra (2013), pp. 153–154 and p. 170. She argues that with Directive 2009/109/ EC Member States have an obligation to implement this merger form. 19 See: Schoonbrood and Bosveld (2006), par. 4; Schutte-Veenstra (2013), p. 170. 20 A group is an economic entity in which legal persons and companies are organizationally connected. Group companies are legal persons and companies who are connected to each other in a group (Art. 2:24b DCC). The group company is also deemed to be a merging company. See for the merger provisions that are applicable for the group company, Art. 2:333a(3) DCC. 21 See: Verbrugh (2007), p. 48, with reference to literature; Gepken-Jager (2007), pp. 298–304; Schutte-Veenstra (2013), pp. 154–155; Zaman et al. (2009), pp. 35 and 185. 22 See Kamerstukken II 2006-2007, 30 929, nr. 7, p. 1/2. Next to the Netherlands, Finland allows cross-border triangular mergers, see Bech-Bruun & Lexidale (2013), p. 104. 23 Kamerstukken II 2006-2007, 30 929, nr. 3, p. 5.

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4 Procedure The domestic and cross-border merger procedure can be distinguished in a preparatory phase, a decision making phase and an execution phase.24 The procedure for cross-border mergers follows the procedure for domestic mergers (general provisions and the specific provisions for NV’s and BV’s), with some additional provisions in Chapter 3A of Title 7 Book 2 DCC for cross-border mergers.25 The merger procedure starts with a common merger proposal prepared by the board of directors of the merging companies. The particulars for the common draft terms mentioned in the Third Directive and the CBMD are transposed in Article 2:312, 2:326 and 2:333d DCC. The most important information in the merger proposal for shareholders is the share exchange ratio. For listed companies, the ratio may be dependent on the stock exchange price on a day prior to the merger (Article 2:325(1) DCC). Next to the merger proposal, the board of directors draw up an explanatory memorandum, explaining the legal, economic and social aspects of the merger. The particulars for this management report mentioned in the Third Directive and the CBMD are transposed in Article 2:313 and 2:327 DCC. The obligation in Article 7 CBMD to explain the implications of the cross-border merger for members, creditors and employees in the report has not explicitly been transposed in Dutch law. An auditor (independent expert) must examine the merger proposal and must declare that he finds the proposed exchange ratio to be reasonable. Furthermore, he must make a statement on the aggregate equity of the disappearing companies in relation to the shares that will be allotted and make a report giving his opinion on the explanatory memorandum (see Article 2:328 and 2:333g DCC). With the consent of all shareholders, the statement on the exchange ratio and the report of the auditor can be waived. The merger proposal together with the last three adopted annual accounts and annual reports have to be deposited with the trade registry or made public through the website of the Chamber of Commerce (www.kvk.nl) (Article 2:314(1) DCC). The board of directors must make available for the shareholders the explanatory memorandum and the other documents at the office of the company or electronically (Article 2:314(2) DCC; see for the works council Art. 2:333f DCC). The merging companies have to announce in a countrywide published newspaper where the documents can be acquired or be electronically available (Article 2:314(3) DCC). For cross-border mergers, some additional information has to be made available in the national gazette (Staatscourant) (see Art. 2:333e DCC and below). For the mother-daughter merger and the sister-merger where no shares are allotted (see par. 3 above), a simplified procedure can be followed (see Article 24

See Asser/Maeijer & Kroeze (2015), nr. 431 and further. See for more details on the procedure: (for domestic mergers) Verbrugh (2007); Zaman et al. (2009); van der Bijl and Oldenburg (2010), p. 234 and further; Asser/Maeijer & Kroeze (2015), nr. 431 and further. 25

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2:333(1 and 2) DCC). In that case, the particulars related to the shares and the exchange ratio need not to be included in the merger proposal and in the explanatory memorandum and no auditor’s statement and report are required. No simplified procedure has been transposed in Dutch law for mergers in which the acquiring company holds 90% or more but not all shares in the disappearing company (see Article 113 Directive 2017/1132). As a main rule, a resolution to enter into the merger must be adopted by the General Meeting (Article 2:317 DCC). The resolution requires a majority of at least two thirds of the votes cast if less than half of the issued share capital is represented at the meeting (Article 2:330(1) DCC). If more than half of the issued share capital is present, a simple majority is sufficient, unless the articles of association stipulate a more strict majority (Article 2:317(4) DCC). Unless the articles of association provide otherwise and 5% or more of the shareholders object, the acquiring company may decide to merge by resolution of the Board of Directors (see Article 2:331 DCC). The General Meeting may attach to the merger resolution the condition that it approves the arrangements relating to the employees’ participation system (Article 2:333k(11) DCC). Before the merger takes effect, the notary shall certify that it has appeared to him that all procedural requirements are complied with (see Article 2:333i DCC; see in case of a request for compensation, par. 6 below). Where the acquiring company is a Dutch company, the notary shall certify at the end of the notarial deed of merger that is has appeared to him that the procedural requirements have been complied with, and that the disappearing companies have passed a resolution on the same merger proposal, and that the arrangements relating to employee participation are adopted in accordance with Article 2:333k (Article 2:333i(5) DCC). A merger involving a Dutch acquiring company shall take effect on the day after the execution of the notarial deed of merger (Article 2:318(1) DCC). A merger involving a foreign acquiring company shall take effect in the way and on the date as specified by the law of the Member State where the acquiring company has its registered office (Article 2:333i(1) DCC). Other than a in a domestic merger (see Article 2:323 DCC), a cross-border merger cannot be nullified (Article 2:333l DCC).

5 Creditor Protection For the protection of creditors, the CBMD provides for some minor provisions and mainly refers to the national laws on domestic mergers.26 The Third Directive provide some guidelines on creditor protection but these are broad and partly

26

See Art. 4(1b and 2), 6(2c) and 7 CBMD. See for art. 6 and 7 CBMD below. See for the protection of creditors in domestic mergers in the Netherlands, Germany, France and Switzerland, Verbrugh (2007).

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vague, however.27 According to the Third Directive, Member States must provide for an adequate system of protection of the interests of creditors of the merging companies whose claims antedate the publication of the draft terms of merger and have not fallen due at the time of such publication.28 Members States have implemented this obligation quite differently and can be categorized in an ‘ex-ante group’ or an ‘ex-post group’, depending on whether the date for creditor protection commences before or after the general meeting deciding on the merger proposal. Problems with the two systems can arise in a cross-border merger where the Member States of the merging companies fall within a different group.29 The Dutch legislator has chosen for protection ex-ante in Art. 2:316 DCC.30 At least one of the merging companies has to provide security or other guarantees to the creditors that demands this, on the penalty that an objection (see below) of the creditor will be declared valid by the court. This, however, does not apply if the creditor already has adequate guarantees or if the financial position of the acquiring company after the merger does not offer less guarantees for the performance of the claim than before. Within a period of 1 month of publication of the public announcement, each creditor may, by means of a petition lodged with the relevant district court, raise an objection against the merger proposal, mentioning the guarantee that is sought. The district court shall deny the request if the creditor has not made plausible that the financial situation of the acquiring company after the merger provides less guarantees that the claim will be satisfied, and that not sufficient guarantees have been obtained from the company. Before the court shall give its decision, it may grant the companies the opportunity to provide a guarantee specified by the court. If an objection is raised in time by a creditor, the notarial deed of merger may be executed only when the objection is withdrawn or the termination of the objection has become enforceable. If the notarial deed of merger was executed already, the court may, upon a legal remedy, order that a guarantee specified by the court has to be provided, which order may be rendered under a penalty payment for non-compliance. Although creditors do not have an effective veto right on the merger,31 they can delay the merger if the companies do not provide for the asked guarantees. It is common practice for the Dutch notary involved in the merger to apply to the district court for a declaration evidencing that no opposition to the merger proposal has been filed by any creditor.32 In practice, however, an objection to a merger seldom takes 27

See Raaijmakers and Olthoff (2008), p. 35. See Art. 99 Directive 2017/1132, for some additional guidelines to Member States on this adequate system of protection. 29 See for the systems in different Member States, Bech-Bruun & Lexidale (2013), p. 54. See further: van Solinge (1994), p. 277; Raaijmakers and Olthoff (2008), p. 37. 30 See also Boschma and Schutte-Veenstra (2012a, b). See for more specific provisions for pledge and usufruct in case of a merger, Raaijmakers and Olthoff (2008), p. 36; van der Bijl and Oldenburg (2010), p. 232. 31 As mentioned by Bech-Bruun & Lexidale (2013), p. 55. 32 van der Bijl and Oldenburg (2010), p. 247. 28

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place.33 The main reason is that assets and liabilities of the companies merge and, unless no shares are allotted, the total value of the assets and liabilities have to be positive in order to allot shares.34 Another reason is probably that in practice many creditors will not be aware of the announced merger, since no personal notification to creditors is needed. Since the protection ex-ante gives certainty on the position of creditors before the merger takes effect and in practice mergers are hardly ever delayed by creditors, the Dutch system of creditor protection can be considered a good system. And once an objection by a creditor takes place, there can be good reasons to do so. Next to the protection of creditors the Dutch legislator has introduced protection for contracting parties in a domestic merger, which also applies to the Dutch company in a cross-border merger. Within a period of 6 months after the merger proposal has been filed, parties to a contract can under circumstances request amendment or rescission of the contract (Art. 2:322 DCC). According to Article 6(2c) CBMD an indication, for each of the merging companies, of the arrangements made for the exercise of the rights of creditors and the address at which complete information on those arrangements may be obtained, shall be published in the national gazette.35 In practice, however, in many announcements in the Dutch national gazette (Staatscourant), only the right of creditors under Dutch law are mentioned. Since the arrangements made for the exercise of the rights of creditors can be very different in the Member States and this can negatively affect the position of creditors in a cross-border merger,36 information in both laws are relevant. From Article 7 CBMD follows that the management or administrative organ of each of the merging companies in their explanatory memorandum also explain the implications of the cross-border merger for members, creditors and employees.37 Under Dutch law, no mentioning is made for the implications of the cross-border merger for creditors. Since this report is only intended for the members and not for creditors and the report is not required under certain circumstances, creditors are, however, formally not protected by this provision in Art. 7 CBMD.

33

See (for domestic mergers): Verbrugh (2007); Ten Voorde (2006); Bech-Bruun & Lexidale (2013), p. 217. 34 Raaijmakers and Olthoff (2008), pp. 34 and 35, state that in a legal merger there is an inherent risk that the liabilities of the acquiring company will exceed the assets. In my opinion, only in a group merger with no shares alloted this risk is likely. 35 See Art. 2:333e DCC. 36 E.g. where a creditor from the Netherlands can only ask for additional safeguards before the merger, whereas German creditors can ask for additional safeguards after the merger. If additional safeguards are being granted after the merger to the German creditors, this can negatively affect the Dutch creditors. 37 See for the explanatory memorandum, Art. 2:313, 2:327 DCC and par. 4 above.

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6 Minority Protection The Dutch legislator has used the option for Member States in Article 4(2) CBMD to protect minority shareholders who have opposed to the merger.38 As Wyckaert and Geens state, Article 4(2) does not indicate (i) who qualifies as a minority shareholder; (ii) in which company (the surviving entity or the disappearing entities) the minority deserves protection or (iii) what the nature of the protection could be.39 Article 2:333h DCC gives minority shareholders of the disappearing Dutch company a right to resign from the company.40 In other words, minority shareholders are only protected in case of an outbound cross-border merger. Who qualifies as minority shareholder under Dutch law follows from the majority rule at the General Meeting to approve the merger. As described in paragraph 4, if more than half of the issued share capital is present at the General Meeting, the minority can be as much as 49%. Minority shareholders of the disappearing company who voted against the merger resolution may file a request against that Dutch company for the payment of a compensation within 1 month after the merger decision.41 The amount of the compensation is determined by one or more independent experts.42 Their report must be disclosed at the same time the merger proposal is filed for the shareholders. In case an agreement between the shareholders and the company or the articles of association provide for guidance as to the price, the experts take due account of these provisions. In case such an agreement or the articles of association provide for clear guidance as to the price, the appointment of independent experts can be left aside.43 The shares to which the request relates, cease to exist at the moment that the merger becomes effective. The notary may only issue the certificate that the procedural requirements are complied with (see paragraph 4 above) if no request for compensation has been filed or if such compensation has already been paid, unless the companies agree that the compensation will be paid by the acquiring (foreign) company. In the latter case the notary mentions in his certificate that the request has been filed (Article 2:333i (4) DCC; see also Article 10(3) CBMD). Since as much as 49% of the shareholders 38

Art. 121(2) Directive 2017/1132. The Dutch legislator followed the advise from the Dutch Committee on Company Law. See Kamerstukken II 2006-2007, 30 929, nr. 3, pp. 16–17. See for an overview on Member States who have used to option provided in Article 4(2) CBMD: BechBruun & Lexidale (2013). See also Wyckaert and Geens (2008), par. IV. 39 Wyckaert and Geens (2008), p. 43. 40 See: van Solinge and van Boxel (2008), pp. 888–890; Leijten (2007), p. 307. 41 For the purpose of this Article holders of depository receipts as meant in Article 2:118a DCC are equated with shareholders (Art. 2:333h(4) DCC). 42 The amount of the compensation normally equals the value of the shares in the disappearing company the moment the draft merger terms are filed, but this does not always have to be the case, since the minority could object to the exchange ratio. See Kamerstukken II 2006-2007, 30 929, nr. 3, pp. 18–19. See also Wyckaert and Geens (2008), p. 48; Gepken-Jager (2007), p. 301. 43 See critically on the fact that the procedure is carried out by independent experts and not by an independent tribunal: Leijten (2007), p. 307; Boschma and Schutte-Veenstra (2012a, b).

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can ask for compensation in an outbound cross-border merger, a lot of money can (potentially) leave the company. Although a proposal for the amount of compensation has to be included in the merger proposal (Article 2:333d DCC), this uncertainty cannot only be a problem for the Board of Directors of the merging companies, but also for the auditor’s statement (see paragraph 4 above).44 One way to reduce this problem could be to (always) require a two-third majority voting in a Dutch company in a cross-border merger in general,45 or only for outbound cross-border mergers. Also, one could argue that a right to resign is not necessary if the company is listed on the stock market. Out of the 779 cross-border merger announcements in the Dutch national Gazette, in 447 announcements a Dutch company was mentioned as the disappearing company. Many of these announcements explicitly state that no minority shareholders are present. A general right to resign from the company is not available in a Dutch domestic merger.46 The Dutch legislator expressed several reasons for this different approach for cross-border mergers in the Explanatory Memorandum.47 The most important reason is that the shareholders of the Dutch company after the merger can no longer institute an inquiry proceeding. Furthermore, other than in a domestic merger, no nullification of a cross-border merger is possible. It is suggested in Dutch literature that this distinction between domestic and cross-border mergers will not hold before the European Court of Justice (see also CBMD Preamble 3).48 I believe, however, that there is a justified and good reason for this difference,49 which is the fact that after the merger foreign company law applies.50 Since the option of minority protection is only available in the CBMD and not in the Third Directive, the (implicit) rationale for the European legislator also seems to be a change in applicable company law. Although company law is to a certain extent harmonized in Europe, the differences between company laws in the Member States can still be big and fundamental. Important topics in company law, such as the powers of the organs and liabilities of directors, have not been harmonized. Besides, the EC Directives do not cover all limited liability companies as described in Article 2(1) CBMD. Furthermore, even

44

See: Verbrugh (2011); van Solinge and van Boxel (2008), pp. 888–890. Compare Section 13.27 European Model Companies Act. 46 Since the Dutch reform on the private limited liability company (BV), shareholders without voting right or dividend right can resign from the company if the acquiring company is not a BV (Art. 2:330a DCC). The reason for that is that only BV’s can issue shares without voting right or dividend right. 47 Kamerstukken II 2006-2007, 30 929, nr. 3, pp. 16–17 and Kamerstukken II 2006-2007, 30 929, nr. 7, p. 15. 48 See: van Solinge (2007), p. 679; Leijten (2007), p. 307; Wyckaert and Geens (2008), pp. 39–40. 49 Although the different treatment could make a cross-border merger less attractive, the case law of the ECJ shows that minority protection can be a justified reason for a restriction on the freedom of establishment. 50 Criticism can therefore be raised to the fact that no special minority protection is available in Dutch law when the Dutch public limited liability company disappears when forming an SE. 45

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(potentially) relatively small or more practical consequences can justify a right to resign, such as the application of a different language and a foreign venue for general meetings. When Wyckaert & Geens state that the change of corporate nationality is an understandable but not really convincing argument for minority protection because of harmonization of company law, they do not take into account the above mentioned points of view.51 Also Section 13.30 European Model Companies Act (EMCA) only recommends a sell-out right for minority shareholders of the disappearing company. To conclude, a cross-border merger could take place with many company types from all the Member States. Not only does this potentially have profound consequences for the applicable company law, it can also have many practical consequences. The mere fact that the company law changes is therefore enough to protect minority shareholders.

7 Employee Participation Article 16 CBMD has been transposed into Article 2:333k DCC. The employee participation system in Article 2:333k DCC is rather complex and many provisions refer to the employee participation system of the SE (SE Regulation and the Dutch Act Employees Involvement in a European Legal Person). In 2015, Art. 2:333k DCC has been amended due to an infringement procedure before the European Court of Justice. In that case the Court declared that the Netherlands had failed to ensure that the employees of establishments of a requiring Dutch company, situated in other Member States enjoy participation rights identical to those enjoyed by the employees employed in the Netherlands (Article 16(2b) CBMD).52 In the Netherlands, the employee participation system is part of the ‘structure regime’, a regime for large companies. According to the Dutch legislator, in a comparison between the level of employee participation systems in the Member States, the structure regime will always win. The reason is that the relevant Dutch law perceives (Dutch) recommendation rights at the same level as (foreign) appointment rights and the structure regime has relatively many recommendation rights (see below).53

51

Wyckaert and Geens (2008), pp. 39–40. They compare public limited liability companies from some Member States to suggest that the differences are not too big in Europe. Harmonization has mostly been realized for public liability companies, however, and less or not at all for other types of limited liability companies in the Member States. Wyckaert & Geens do, however, (indirectly) also plea for more harmonization. 52 Case C-635/11. Art. 2:334k(2) and 2:333k(3c) DCC was introduced in 2015. See for these provisions below. 53 See Kamerstukken II 2006-2007, 30 929, nr. 3, p. 24. See also Bech-Bruun & Lexidale (2013), p. 733; van der Bijl and Oldenburg (2010), p. 247.

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The structure regime applies to NV’s and BV’s if for at least three consecutive years (Art. 2:153(2) DCC for the NV and 2:263(2) DCC for the BV): (i) the company’s issued capital and reserves amounts to at least 16 million EUR according to the balance sheet; (ii) a works council is installed at the parent company or an dependent company; (iii) at least hundred employees are employed in the Netherlands by the company and its dependent companies.54 Once the structure regime applies, the NV or BV is obliged to install a Supervisory Board.55 The Supervisory Board in a structure regime has some additional powers, which include the power to appoint and dismiss members of the Board of Directors.56 The members of the Supervisory Board are appointed by the General Meeting on the basis of a nomination by the Supervisory Board. For the nomination, the works council and the General Meeting can recommend candidates and the works council has an enhanced right of recommendation for one third of the members of the Supervisory Board.57 With the amendment in 2015, the principle rule of Article 16(1) CBMD that the acquiring company shall be subject to the rules concerning employee participation, if any, in the Member State where it has its registered office, was introduced in Article 2:333k(2) DCC.58 If the acquiring company is an NV or BV, Dutch law will apply, except in the following three cases mentioned in Article 2:333k(3): (i) any of the merging companies employed in 6 month preceding the date of filing of the merger proposal more than 500 employees on average and this company is operating under an employee participation system; (ii) the national legislation applicable to the acquiring company does not provide for at least the same level of participation applicable in the merging companies, measured by the number of employees in the supervisory or administrative body, in the committees of those bodies or the management body that is responsible for the profit-determining entities of the company; (iii) the national legislation applicable to the acquiring company does not require employees of establishments of the acquiring company located in other Member States to have the same right to exercise co-determination rights as employees in the Member State where the acquiring company has its registered office. 54

See for dependent companies Article 2:152 and 2:262 DCC. Under certain circumstances, a less strict structure regime or an exemption for the regime can apply. Companies with a works council can also voluntarily apply the structure regime. 55 Since 2013 the structure regime can also be applied in a one-tier board system. In that case the provisions that apply to supervisors are equally applicable to non-executive directors (Art. 2:164a and 2:274a DCC). 56 Furthermore, a number of important decisions of the Board of Directors need approval of the Supervisory Board. See Art. 2:164 and 2:274 DCC. 57 See Art. 2:158 and 2:268 DCC and van der Bijl and Oldenburg (2010), p. 248. 58 Before 2015, Article 16(1) CBMD had not been transposed into Dutch legislation, since the Dutch legislator considered a transposition of the principle as unnecessary because the generally applicable structure regime offers sufficient employee participation. See: van der Bijl and Oldenburg (2010), p. 247; Bech-Bruun & Lexidale (2013), p. 733.

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If one of these cases occur, the employee participation system with the acquiring company is regulated in accordance with the principles and regulations set out in Article 12 paragraphs two to four of the SE Regulation and paragraphs four to fourteen.59

References Bech-Bruun & Lexidale (2013) Study on the application of the cross-border mergers directive, September 2013. https://doi.org/10.2780/96404 Boschma HE, Schutte-Veenstra JN (2012a) Waarborgen voor schuldeisers; verzet door schuldeisers. In: T&C Burgerlijk Wetboek, commentaar op artikel 316 Boek 2 BW Boschma HE, Schutte-Veenstra JN (2012b) Verzoek tot schadeloosstelling. In: T&C Burgerlijk Wetboek, commentaar op artikel 333h Boek 2 BW Gepken-Jager EEG (2007) Wetsvoorstel betreffende grensoverschrijdende fusie van kapitaalvennootschappen. Ondernemingsrecht (8):95 Kroeze MJ (m.m.v. Beckman H en Verbrugh MA) (2015) Mr. C Assers Handleiding tot de beoefening van het Nederlands Burgerlijk Recht. 2. Rechtspersonenrecht. Deel I. De rechtspersoon, Kluwer, Deventer Leijten AFJA (2007) Het uittreedrecht voor aandeelhouders volgens het wetsvoorstel grensoverschrijdende fusies (30 929). Ondernemingsrecht (8):96 Raaijmakers GTMJ, Olthoff TPH (2008) Creditor protection in cross-border mergers; unfinished business. Utrecht Law Rev 4(1):34–39 Schoonbrood JDM, Bosveld R (2006) Richtlijn betreffende grensoverschrijdende fusies van kapitaalvennootschappen definitief in werking getreden. Ondernemingsrecht (1):5 Schutte-Veenstra JN (2010) Grensoverschrijdende fusie: rechtsvormen, voorwaarden en toepasselijk recht. Ondernemingsrecht (10/11):86 Schutte-Veenstra JN (2013) Europees Ondernemingsrecht. Sdu Uitgevers, Den Haag ten Voorde H (2006) Deponering, publicatie en verzet. Een onderzoek naar procedures rond vereffening, omzetting, kapitaalvermindering, fusie, splitsing, beëindiging van de overblijvende aansprakelijkheid uit een 403-verklaring. Kluwer, Deventer van der Bijl P, Oldenburg F (2010) The Netherlands. In: van Gerven D (ed) Cross-border mergers in Europe, vol I. Cambridge University Press, New York van Solinge G (1994) Grensoverschrijdende juridische fusie. Kluwer, Deventer van Solinge G (2007) Een nieuwe rechtsfiguur met oude wortels. Weekblad voor Privaatrecht, Notariaat en Registratie (6721):674–680 van Solinge G, van Boxel HJMM (2008) Bescherming van minderheidsaandeelhouders bij een grensoverschrijdende fusie. Weekblad voor Privaatrecht, Notariaat en Registratie (6776):885–897 Verbrugh MA (2007) Structuurwijzigingen bij kapitaalvennootschappen en de positie van schuldeisers: een rechtsvergelijkend onderzoek naar juridische fusie, splitsing en omzetting. Kluwer, Deventer Verbrugh MA (2011) Wijziging van Boek 2 BW ter uitvoering van Richtlijn 2009/109/EG inzake (grensoverschrijdende) juridische fusies en splitsingen. Ondernemingsrecht (6):44

59 See for that system (with sometimes other paragraph numbers in the Articles due to the amendment in 2015): van der Bijl and Oldenburg (2010), pp. 249–253; Bech-Bruun & Lexidale (2013), pp. 735–737 (where ‘Environmental Impact Assessment Directive’ should be read as ‘Act Employees Involvement in a European Legal Person’).

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Wyckaert M, Geens K (2008) Cross-border mergers and minority protection: an open-ended harmonization. Utrecht Law Rev 1:40–52 Zaman DFMM, van Eck GC, Roelofs ER (2009) Nationale en grensoverschrijdende juridische fusie & juridische splitsing van kapitaalvennootschappen. Sdu Uitgevers, Den Haag

M. A. Verbrugh LL.M. studied law at Erasmus School of Law, Rotterdam, the Netherlands and obtained his LL.M. degree in 2000. In the same year, he finished the postgraduate education ‘International Trade Law’, in Turin, Italy. After that, Verbrugh worked for a year at the law firm Lalive & Partners in Genève, Switzerland. Since 2002, he works at Erasmus School of Law, first has PhD-Candidate (PhD obtained in 2007), from 2008 as associate professor in company law and from September 2018 as professor in European and comparative company law at Erasmus School of Law.

Cross-Border Mergers: Experiences from Poland Ariel Mucha and Arkadiusz Radwan

1 Introduction This paper seeks to examine certain issues concerning the implementation of 10th company law directive on cross-border mergers (hereinafter “CBMD”)1 into Polish company law and the practical implications of the transposing provisions for Polish companies 10 years after.2 In particular, data on cross-border merger transactions was gathered for the purposes of analysing cross-border mobility of companies governed by Polish law in this regard. Currently, the legal framework for cross-border transactions in Poland covers only cross-border mergers (hereinafter “CBMs”) of companies (private and public) and of course via direct application of EU law—the transfer of the seat of Societas

1 See Articles 118–134 of the Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, O.J. 2017, L 169/1. Former, the European Parliament and Council Directive 2005/56/EC of 26 October 2005 on cross-border mergers of limited liability companies, O.J. 2015, L 310/1. 2 Polish company or any other nationality refers to company established and being governed by the rules of such state.

A. Mucha Jagiellonian University, Law and Administration Faculty, Kraków, Poland Allerhand Institute, Kraków, Poland e-mail: [email protected] A. Radwan (*) Polish Academy of Sciences - Scientific Centre in Vienna, Vienna, Austria Vytautas Magnus University, Kaunas, Lithuania Allerhand Institute, Kraków, Poland University of Social Sciences, Łódź, Poland e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_21

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Europaea within the territory of EEA as governed by the SE Regulation.3 In addition, although Polish law does not provide for an explicit legislation on the cross-border conversion procedure of a Polish company (the process comprises company’s seat transfer with an attendant change of applicable company law),4 the possibility to conduct such operation may not be ruled out. Soon after the CJEU’s Polbud decision (C-106/06),5 there was one case in which an Italian company smoothly converted itself into a Polish private company.6 Therefore, CBMs remain a key mechanism to enable companies to achieve corporate mobility. The paper, first, outlines the legal framework for those transactions, with special focus on the most sensitive issues, i.e. creditor and minority shareholder protection. Secondly, it presents and analysis data on cross-border mergers in Poland between 2009 and mid-2018. The analysis encompasses 126 records of cross-border transactions and cross-border merger plans related thereto.

2 Legal Framework for Cross-Border Mergers in Poland Cross-border mergers of limited liability companies (public and private) and limited joint-stock limited partnerships (spółka komandytowo-akcyjna) were introduced in Poland as a result of the amendment to the 2000 Code of Commercial Companies (CCC).7 The said amendment entered into force on June 20, 2008. Needless to say, the introduction of the new section on cross-border mergers was motivated by the obligation arising from EU law to implement CBMD. The amendment was preceded by an extensive debate in the Polish academia and prepared by prominent legal scholars.8 The rules provided for in Chapter 21 of CCC comprise 19 provisions that are legi speciali to the general provisions for domestic mergers contained in Chapter 2. The way CBMD was transposed almost mirrored the legal framework for domestic 3 See Art. 8 of Regulation (EC) No. 2157/2001 on the Statute for a European Company (SE), O.J. 2001, L 294/1. Worthy noting is that 5 cross-border transfers of the SE’s seat (inbound and outbound) were carried out in Poland and one is now in progress (inbound). 4 For an overview of the legislation on cross-border seat transfers in the European Union, see Biermeyer (2015) and Gerner-Beuerle et al. (2017). 5 Judgment of the Court (Grand Chamber) of 25 October 2017, ECLI:EU:C:2017:804. See Mucha and Oplustil (2018). 6 The time of the execution of that transaction was 7 days after the complete application was filed by the Italian company to Polish register court in Szczecin. Meanwhile, however, the register Court in Kraków dismissed application for the conversion of Polish company into Czech company reasoning that such operation is inadmissible under Polish law. 7 Kodeks spółek handlowych of Sep 15th, 2000, consolidated version Journal of Laws of the Republic of Poland of 2017, item 1577. The CCC is a comprehensive regulation of companies and partnerships, as well as their mergers, divisions and transformations. 8 Instead of many see Romanowski and Opalski (2009).

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mergers and clear reference was made to the respective provisions. However, some significant modifications are worth mentioning, as we do below. A statutory merger may be structured as acquisition of the assets of the disappearing company or by formation of a new company9 (cf. Article 492 § 1 CCC). In addition, a fast-track procedure (hereinafter “FTPs”) is foreseen as a way to simplify intra-group mergers (between parent company and subsidiaries). The Polish legislator does not allow transactions, which would result in the shareholders of the acquired company to be only offered payment for they shares (freezeout or cash-out merger, Germ. Verschmelzung gegen Geld), and thus without issuing shares in the company resulting from the merger. In the latter case, the shareholder of a company being acquired may receive only cash payment of the maximum of 10% of the accounting or nominal value of shares granted to the particular shareholder (Article 492 § 2 CCC). Thus, the 10% threshold was designed to be technical by its very nature as it is facilitative for transactions where arithmetic of the share exchange ratio would result in issuing fraction of shares. By capping the cash payment, the assets of the surviving company are vastly sustained, and minority shareholders are protected from being squeezed out. It seems, however, that the prohibition (ex ante instrument) of exceeding the 10% limit is too restrictive, especially if interested shareholders agreed to leave the company.10 The possibility of such a merger could be particularly important for acquisitions of relatively small companies. The preservation of crucial assets and stable financial conditions of the acquiring company could in such a situation be achieved through other means. Examples may include the obligation for management board members to issue solvency declaration, i.e. the acquiring company’s ability to buy out certain shareholders without significantly affecting the company’s financial standing. Refereeing to other normative types of mergers under Polish company law, there is no specific legal framework in place for sideways mergers, i.e. operations whereby one or more ‘sister’ companies merge into another sister company. Similarly, triangular mergers are not an option since shareholders may not be offered shares of the company not involved in a merger transaction. Therefore, in practice such operations need to be executed in two consecutive mergers deeming them lengthier and more susceptible to failure.

3 Cross-Border Merger Procedure Generally, Polish provisions on cross-border mergers follow the European model of structured and multi-layered procedure. The operation consists of three stages: information disclosure, decision making and third-party (judicial) control. First

9

Provisions on the cross-border merger by setting up a new company has been a dead letter since the implementation of them into Polish law. Practically, none of the transactions examined by the authors took place in that mode. 10 Obviously, this can be achieved also by execution of exit right by the minority, described below.

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stage includes drawing up the draft terms of the merger (DTM) and of the management report justifying the merger. Additionally, an independent expert is to be designated in order to verify the DTM. The next stage comprises of the decision of shareholders in the form of the resolution made by the general assembly. The third stage starts with filling an application for the pre-merger certificate (‘exit case’) or registration of the merger (‘entry case’). In the application, companies must demonstrate, subject to verification by the local register court, whether the minority shareholders’ rights, such as the right to challenge company’s resolution or right to be bought-out (appraisal right), and creditors’ right to request that their claims be secured have been fulfilled. There is no need here to go into details of each of the above outlined stages, as their detailed analysis has been provided elsewhere.11 On the basis of the assessment of Polish practice of cross-border mergers, it must be admitted that DTM, the basic document providing information on the envisaged transaction, tends to be prepared by management boards with due care and diligence required by the law. This applies, in particular to information covering data on companies participating in a merger and relationship between them. Yet it must be admitted that the prevailing number of CBMs involving Polish company are intragroup transactions, and most of them are carried out under FTP rules. Precise description included in the merger plan serves to prove that the proceedings may be conducted in the later mode, i.e. with laxer minority protection (“take it or leave it”-approach, i.e. tolerate or exit the company). Furthermore, companies do not provide any special benefits to members of management bodies or independent experts, which seems to result from the Polish corporate governance model12 and the dominant role of a majority shareholder in most companies. The role of an independent expert in the information stage of CBMs, in general, is limited to verifying financial aspects included in the DTM—share exchange ratio. There is no clear indication in legal provisions as to what sort of information designated independent expert should include in its opinion or according to what kind of methods it should evaluate the economic value of merging companies. In practice, an independent expert is rarely appointed to participate in CBMs. In only 5 out of 97 effective transactions (5%) an expert was appointed in Poland. This is due to the striking prevalence of intra-group merger transactions in the dataset. According to Article 51615 § 1 CCC, in case of a merger with a wholly owned subsidiary the requirement to appoint an independent expert is waived. Similarly, all shareholders of a merging company may express their will to opt-out from the requirement of having the merger plan examined by an expert (Article 5166 § 3 read in conjunction with Article 5031 § 1 point 3 CCC). It is worth pointing out that the use of the option to exclude an expert by the consent of shareholders in some

11 For a very detailed description of the Polish law on cross-border mergers see: Wroniak et al. (2012), Ch. 14. 12 See general on corporate governance models: Weimer and Pape (2008).

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situations, especially public companies with dispersed ownership, can be significantly impeded. A clear wording of art. 125 par. 4 directive (EU) 2017/1132 leaves no space to the national legislators for setting minimal threshold sufficient to waive the requirement in question. Taking one step back it is pertinent to ask to what extent having an expert involved in the merger procedure adds value that, in terms of protecting minority shareholders, exceeds its costs (time and money). According to Polish provisions, presence of an expert in CBMs’ procedure is characterized by a narrowly defined role that it has to play. Indeed, the latter is limited to the valuation of the company’s assets and exchange ratio. Just for comparison, in Denmark an independent expert plays special part in creditor protection by assessing the impact of the transaction on the acquiring or new company’s ability to meet its existing liabilities (Article 277 of Danish Company Law). A negative assessment improves chances of creditors to obtain proper safeguards of their claims (Article 278 of Danish Company Law).13 Widening the role of an expert in Poland would certainly affect its remuneration to be paid, and therefore the total cost of the merger. In any case, the current position of an expert does not have any profound meaning for the practice. Expanding the competence of the expert to examine the effects of the merger would at least increase protection of creditors, which at the moment is based on the assessment made by a registry court that lacks sufficient expertise in that regard. The solution whereby expert’s scope of involvement would be broadened would therefore positively affect creditors’ situation. It merits attention that the proposed amendments to the CBMD go towards borrowing from the Nordic model to empower the expert and make the scope and means of creditor protection sensitive to the outcome of expert opinion.14 The next stage of the cross-border merger procedure is about shareholders’ approval and the associated question of minority shareholders protection, specifically shareholders opposed to the merger. When it comes to shareholders’ say on the deal the provisions on cross-border mergers do not provide for any special formal requirements that would override or replace the ones applicable to domestic mergers. According to Article 506 § 1-5 CCC the resolution shall be made by a qualified majority (2/3 for listed companies or 3/4 for other companies, i.e. non-listed jointstock companies and private companies) with a quorum amounting to a half of the share capital to be present or represented at the meeting and must be drawn up by a notary public. This means that the merger may be vetoed only by a group of 1/3 or 1/4 minority shareholders, respectively. It follows from the above that the Polish legislator did not use the option of general exemption of the requirement to adopt a resolution by the shareholders of the acquiring company (cf. Article 126 (3) in conjunction with Article 94 of the Company Law Directive). This should be assessed negatively, as making this option

13

See Andersen and Sørensen (2013), pp. 250–251. See Article 126b(3a) of the Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241. 14

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available would significantly facilitate the merger of companies with small shareholders (holding less than 5% of shares capital). It must be admitted, however, that such a solution could raise doubts from the perspective of the Polish understanding of constitutional right to court, as in fact it would establish a threshold for shares to be held as a formal condition to appeal to the court against the merger decision.15 As a general rule in Polish company law, every resolution adopted by the shareholders’ meeting may be challenged by every individual shareholder who voted against a resolution and fulfilled few other mainly procedural requirements. Moreover, filling of a complaint against a resolution to the court does not affect the effectiveness of a challenged resolution (cf. Article 423 § 1 CCC). However, this rule does not extend to instances where a claim against the resolution constitutes an obstacle to issue pre-merger certificate. Thus, even one shareholder with minimal fraction of shares may effectively slow down the entire transaction. Nevertheless, a merging company may be granted a leave to move forward with the operation in spite of a pending judicial dispute about the merits of the legal challenge to the resolution approving the merger. According to Article 51618 § 1 CCC, the main basis for issuing the leave is that the interest of the company justifies the merger to be carried on without undue delay.16 With no case-law in that regard it is hard to tell what impact that provision has on cross-border practice in Poland. Switching focus to minority shareholders protection, apart from enabling minority shareholders to be involved in the decision-making process by voting against or challenging the merger resolution, Polish company law adopts specific remedies for minority shareholder protection, commonly known as appraisal right i.e. dissenters’ exit remedy to withdraw from the company against adequate cash compensation (Article 51611 CCC). Appraisal right substitutes an implied veto right with a statutory exit right. Thereby it aims at compensating the elimination of shareholders’ rights to decide unanimously upon fundamental corporate changes in accordance with Kaldor-Hicks efficiency paradigm.17 It also gets rid of the hold-out problem and its inherent allocative and technical inefficiencies that unanimity rule would have entailed. Since cross-border mergers involve not only anticipated synergies between consolidated companies but also change in corporate law applicable to (shareholders of) a merging (disappearing) company,18 it may drastically change rules of the corporate game. In other words, companies may pick up a jurisdiction by using a merger procedure in order to eliminate or weaken some of the minority rights (CBM as an instrument of regulatory arbitrage or forum shopping). By voting against the 15 It was once ruled as unconstitutional by the Polish Constitutional Tribunal in case SK 23/03 of March 8th, 2004 in relation to general requirement of holding more than 1% of votes during shareholders meeting in order to be entitled to challenge any resolution. 16 This provision is vastly based on § 16 sec. 3(1) and (3) German Transformation Act (Umwandlungsgesetz). 17 See in context of cross-border restructurings: Lombardo (2009), p. 647. 18 Basically, company merges into a company set up in another Member State (‘shell’ company) in order to change its ‘legal clothes’ (downstream merger, also known as reverse vertical merger. See Siems (2008), pp. 179–180.

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merger shareholders may resort to exit right in order to be bought out from the company and retain (so the theory) the pre-transaction value of their shares. It only applies to outbound mergers (corporate emigrations), where the acquiring or the newly established company has its registered office in a country other than Poland. Hence the rationale lies with the change-of-applicable-law being the trigger of the appraisal remedy. Where there is no change of the lex societatis involved, dissenters are not granted exit right. Consequently, inbound mergers (corporate immigrations), like pure domestic combinations, do not trigger appraisal right. This is based on a premise that shareholders of the Polish acquiring company involved in a CBM should not be treated in a better way than if they participated in a domestic operation. In general, once the appraisal remedy is triggered by the general meeting’s approval of the outbound merger, dissenting shareholders may request that their shares be bought out. This requires fulfilment of certain procedural requirements such us voting against the merger resolution, requesting the objection to be recorded, and then submitting a relevant statement to the company (article 51611 § 1 CCC). Merging company’s acquisition of own shares with a view of satisfying the claims of withdrawing shareholders are however capped by the law: the nominal value of the shares so acquired counted together with shares already held by the company may not exceed 25% of the total share capital of the company (Article 51611 § 6 CC). This raises a question of what should be done in a situation where the repurchase of shares from all dissenters wishing to exit the company would exceed the limits as set by the law. Accepting that the company may refuse to repurchase shares due to the potential exceeding of the 25% limit would mean that the right of exit based on art. 51611 § 6 CCC is actually conditional and, in many cases, illusory as it could be easy to dodge the obligation imposed on the merging company through earlier acquisition of own shares close to the legally allowed threshold. Nevertheless, in the literature, some authors express the view that share buy-back from all tendering shareholders should not be seen as sine qua non of a successful transaction.19 In other words, as these authors believe, in case of an excessive number of shares put up for sale, the acquired company may continue with the operation and only should make a proportionate (pro rata) “reduction” of demands to redeem shares. A similar position was presented by K. Oplustil, who, however, remarked that “this cannot mean acceptance of the activities of the company and its majority shareholders, which would make illusory the right to exit for the minority shareholders”. An example of this would be the acquisition of own shares by the company beforehand.20 Opposing view, as represented by one of the co-authors21 and with which the second co-author agrees, equals company’s inability to satisfy the demand of all dissenting shareholders tendering all their shares with a negative condition of the merger. To put is simply: if too many shareholders wish to withdraw, the transaction fails. This understanding is supported by one of the economic explanations of appraisal

19

Rodzynkiewicz (2016), pp. 408–409. Oplustil (2015), p. 1258. 21 Radwan (2016), pp. 92–93. 20

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statutes: they are designed to incentivize the decision makers to design widely acceptable conditions of the deal, sanctioned by the prospect of the obligation of paying pre-transaction value or having the transaction stopped whatsoever. Turning to creditor protection it is worth mentioning that Polish law grants no veto right. Creditor protection is based on the mechanism of securing the creditor’s claims before taking any decision on the issuance of the pre-merger certificate (article 51610 § 2 CCC). In the event of a threat of satisfying creditors as a result of a merger, they may file the application for collaterals of their claims within 1 month from the publication of the merger plan. Then, the company is obliged to establish an appropriate security at the request of each creditor. In the event of refusal, the latter is entitled to bring an action before the court of law. It is difficult to provide a proven record of the workability of the said protective mechanism as there is no case-law reported and Polish commentators are divided with regard to the question how creditors may pursue their rights before competent courts. According to one position, the right to request security is autonomous and the request may be submitted separately from the main claim (substantive nature of security).22 Other authors are of the opinion that it may be filed only “next to” the main claim close to (no more than 2 weeks) or after instituting the in-court proceedings (procedural nature of security).23 Generally speaking, substantive company law on the issue in question, the mirror-image of EU secondary law provisions (Article 99 Directive (EU) 2017/1132), is not adjusted to procedural rules applicable to the proceedings before Polish courts. Therefore, it would cause much difficulties for creditors to use rights which are granted upon them according to EU law. Different mechanism applies when the acquiring or newly set up company is to be located in Poland. Then, provisions on domestic mergers prevail and post-merger protection mechanisms apply. In accordance with Articles 495 and 496 of CCC, the acquiring company shall manage assets assumed from the acquired company separately until satisfying or securing the claims of all creditors who demand payment or security in relation with the merger. During the period of separate management of assets, creditors of the acquiring company will have the priority of being satisfied out of assets of the acquiring company while creditors of the acquired company will have the respective priority of being satisfied out of assets of the acquired company. The procedure presented above is the default method of CBMs adopted in Polish law. Apart from that, the legislator provided for a simplified procedure (Articles 516 and 51615-51616 CCC). At the same time, a subcategory of cases should be distinguished, namely mergers by acquisition of a wholly-owned and almost whollyowned subsidiary, in which the acquiring company holds at least 90% of shares in the share capital. In relation to the merger of a wholly-owned subsidiary, it is not required to issue shares to the acquiring company. Hence, the observance of rules related to the formulation and verification of the share exchange ratio and the granting of shares in the acquiring company is not required (Article 5163 points 2, 4–6 regarding the elements of the merger plan and Article 5166 CCC imposing

22 23

Rodzynkiewicz (2016), pp. 152–154. Szumański (2009), p. 304; Oplustil (2015), p. 1149.

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obligation to examine the plan by an expert). In case of a Polish acquired company, it is pointless to adopt a resolution regarding the merger, which would be unnecessary formalism and therefore this obligation is removed by Article 51615 § 2 CCC. Considering mergers with nearly fully owned companies, the Polish legislator decided to tighten the formalities for companies involved in this type of operations (Article 51615 § 3 CCC). Consequently, the absorption of nearly fully owned subsidiary requires to draw up an expert opinion (Articles 502–503 CCC), unlike for domestic mergers where expert opinion is not mandated (see Article 516 § 5 CCC). For the rest, the Polish acquiring company is not obliged to adopt a resolution on the merger (Article 516 § 1 in conjunction with Article 5161 CCC). However, this provision does not extend to listed companies nor does it apply whenever a shareholder holding at least 5% in the share capital requested the shareholders vote on the transaction (Article 516 § 2 in conjunction with Article 5161 CCC). To sum up the section on the simplified modes of CBMs, it must be asserted that Polish provisions unduly overreach to embrace scenarios where the full merger procedure does not make much sense. This concerns mainly the merger of the so-called ‘sister companies’ (companies controlled by the same entity). In such a situation, it is not justified to require companies to exchange shares, and consequently apply provisions that are to guarantee the correctness of this element of the merger procedure. Even in such situations, however, a certain simplification of the procedure may be achieved by providing consent of the shareholders in order to circumvent the obligation to prepare an expert opinion (Article 5166 § 3 CCC). In addition, Articles 51615 § 1 and 516 § 1, 5 and 6 CCC do not take as relevant the fact that the threshold of 90% and 100% shares in the acquired company may be achieved by a group of shareholders acting in concert with the acquiring company. The possibility of reaching the indicated agreement should be treated as equivalent to the company holding all or almost all shares in the acquired company. The regulations discussed here are also not adapted to more complex capital structures, in which the relationship between companies depends indirectly on the control of other entities (pyramid structures). Bearing in mind that CBMs of group-integrated companies (parents’ and subsidiaries’ alike) represent the vast majority of crossborder mergers involving Polish entities, streamlining simplified mergers should be an important policy goal for the Polish legislator. As the above analysis demonstrated, there are at least a few areas where changes and new regulations are necessary to facilitate the implementation of certain types of mergers in order to meet the actual needs of the economy. Empirical data from other EU jurisdictions confirms the prevalence of intra-group CBM in the available datasets.

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4 Data Analysis of Cross-Border Mergers with Polish Companies 4.1

Methodology

This part of the paper presents data on cross-border mergers, in which at least one of the merging (acquiring or newly established) company was a company governed by Polish law. Overall, data has been collected for the time between 20 June 2008, when relevant provisions entered into force in Poland, to June 2018. So, the time-span amounts to 10 years. The observations are based on data gathered in the Polish KRS databases (‘National Court Register’) using the search engines of the Internet portal https://ekrs.ms.gov.pl/web/wyszukiarka-krs/strona-glowna run by Ministry of Justice, as well as the portals https://imsig.pl, https://mojepanstwo.pl. The two latter are commercial search engines containing information published in the National Official Journal (‘MSiG’). This is important since every CBM must be recorded in the MSiG (Article 508 CCC). In addition, databases of foreign registers, in particular Cypriot and Luxembourgian, were used (directly or via the portal https://e-justice.europa.eu). The analysis of each merger was based on the content of the published merger plan (draft terms of merger) in MSiG and on the website of the companies concerned. Out of 126 observations in 5 cases, the merger plan could not be found, and the data was based on the partial information from the Polish business register. All cross-border transactions are subsequently checked via KRS (and in some cases, foreign business registers) for the relevant information needed to establish whether a given transaction went through, i.e. ended up with a completed merger (i.e., notices of deletion from the registries). Unfinished CBMs were divided into two groups. First, it was assumed that transactions in which the merger plan was published in a time span longer than 1 year from the date when this research has been conducted and there is no information in the Polish or foreign register about the completion of the merger are transactions that failed or have otherwise been abandoned. Second, other transactions were assumed as pending, i.e. being in progress (ongoing CMBs). In this paper each multi-merger in the legal and economic sense (more than two companies apply for registration of a merger) is a set of individual mergers.24 So, if four companies are involved in a merger procedure and one of them is a Polish company, there are three separate transactions indicated underneath. There was no transaction involving more than one Polish company.

24

Cf. Biermeyer and Meyer (2018), pp. 3–4.

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140 116

120

97

100

84

80

69

60

39

40 20

16

11

21

25

29

2012

2013

2014

0 2010

2011

Number of completed transactions

2015

2016

2017

2018

Number including pending transactions

Fig. 1 Aggregated number of CBMs with Polish companies, year by year; 2009–(mid)2018

4.2

CBMs in Poland: Analysis and Presentation of Data

Referring to the number of CBMs involving Polish companies, the available data allows to identify 126 such cases from 2008 to mid-2018, with the first transaction commenced in 2009 and completed in 2010. Out of this number, 97 were successful, 19 are assumed to be pending (in progress) and 10 failed (see Fig. 1). Between 2015 and 2018 a surge in number of transactions can be observed. In 48 transactions, a Polish company was the acquiring company, whereas in 49 it was the acquired one. Breaking the figure down to corporate forms we identified 34 joint-stock companies (S.A.), and 61 limited liability companies (sp. z o.o.). In relation to foreign companies involved in those mergers, private limited companies appeared in 80 cases, whereas joint-stock companies in 17 (including three SEs). There is a clear domination of private foreign companies being employed to acquire Polish entities. The reasons for this situation may be twofold. Firstly, it is less costly to set up limited company especially in countries such as Luxembourg or Cyprus. Secondly, it can be assumed that foreign companies mostly serve as a tool for tax optimisation purposes and not for conducting a real economic activity abroad. The next chart (see Fig. 2) shows what companies sorted by their nationality (governed by foreign law) were involved in mergers with Polish companies. Those companies come from 19 countries of the EEA. Not surprisingly, two first positions are reserved for popular tax heaven destination. Those are Cyprus and Luxembourg. The Netherlands comes third, which is one of the most “congested” Member States in terms of companies traffic in Europe.25 Companies from those three countries represent almost 66% of all merger transactions with Polish companies. Figure 3 presents the “transaction balance” between Poland and a sample of countries embracing top-5 most transaction-intense jurisdictions. The balance results

25

Cf. ibid., p. 6.

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40

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

35 30 25 20 15 10

Sweeden

Latvia

Hungary

Greece

Finland

Belgium

Slovakia

Romania

Malta

France

Estonia

Denmark

Czechia

UK

Austria

Germany

Netherlands

Luxembourg

0

Cyprus

5

Fig. 2 Foreign companies involved in merger with Polish companies by their origin

35 30 25 20 15 10 5 0 aquiring (entry cases) acquired (exit cases)

Cyprus 29 15

Germany 1 6

Netherlands Luxembourg 7 5 7 12

Malta 2 3

UK 0 4

Fig. 3 CBMs per EU Member State with involvement of Polish companies as acquiring or acquired company

from the juxtaposition of immigration (entry) with emigration (exit) cases. For the former category a Polish company was the acquiring company (entry cases), whereas for the latter category a Polish company was the acquired entity (exit cases). The country with the highest negative balance vis-à-vis Poland was Cyprus, where the entry/exit surplus amounted to 14. We identified a reverse trend for mergers between Poland-incorporated and Luxembourg-incorporated companies, where the exit operations (as seen from Poland) exceed immigrations by 6. Mostly, mergers were conducted with the participation of companies from Cyprus or Luxembourg (over 50%). As Fig. 4 illustrates, the fact that the number of acquiring Polish companies has outweighed those acquired by companies from

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8 7 6 5 4 3 2 1 0 aquiring acquired

2010 1 4

2011 0 1

2012 2 1

2013 1 1

2014 2 0

2015 4 6

2016 7 7

2017 6 4

2018 5 0

Fig. 4 Number of CBMs with involvement of Polish companies as acquiring or acquired company with companies from Cyprus and Luxembourg

12 10 8 6 4 2 0 2010

2011

2012

2013

2014 aquiring

2015

2016

2017

2018

acquired

Fig. 5 Relation between number of Polish companies as acquiring and acquired company with companies from Cyprus and Luxembourg in case of multi-CBMs

the mentioned Member States in the last few years. However, the positive balance is a relative narrow margin and there is no strong basis for asserting any clear tendency at that regard. It is worth noting, however, that the number of emigration transactions (a Polish company acting as acquired company) was de facto lower in 2015 and 2016, because then some multi-mergers occurred. More specifically, those were 4 reorganisations designed as coordinated acquisitions of more than one Polish company by a single foreign entity. Hence, they were 2 transactions in 2015 instead of 6, and 2 instead of 7 transactions in 2016 (see Fig. 5 below). Considering those data, we identify an increasing trend in acquisitions of Cypriot and Luxembourgian companies by Polish

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Fig. 6 Overview of multiCBMs with Polish companies found between 2008 and 2018

Multi-CBMs, 11

Regular CBMs, 74 Regular CBMs

Multi-CBMs

companies. This seems to be a tax driven development as it correlates with entering into force (January 1, 2015) of new tax legislation in Poland regarding direct taxation of income obtained through controlled foreign companies (CFCs).26 As regards multi-mergers, Fig. 6 shows that 13% of CBMs involved more than two companies and are thus qualified as multi-CBMs. The remainder of CBMs took place between two companies, one from Poland and one foreign. It must be added, however, that some ‘regular’ CBMs (4) were de facto multi-CBMs since companies intentionally divided one economic transaction into more merger operations in order to take advantage of preferable legal regulation, in particular FTPs.

4.3

Final Notes

Some other observations follow from the analysis of CBMs common terms, which is worth to be mentioned here. The average time span needed to complete CBMs amounts to 6 full months (5.5 month for entry cases; 7 months for exit cases), this is from the moment of publishing a merger plan till registration of the transaction by the competent authority.27 As we already mentioned above, the most interesting fact is that almost all CBMs were used for intra-group restructurings with arm’s length mergers, if any, remaining a small fraction in the dataset (for 7 transactions the gathered data does not allow us to make a clear finding). This factual setup

26

See art. 24a of Act of February 15, 1992 on legal person’s income tax, consolidated text: Polish OJ of 2018, item 1036. 27 One reservation needs to be done here: in case of an exit transaction, in which Polish companies were merging into foreign company, the date of completing merger was the moment of deleting Polish company from the commercial register. The main reason for this is scarcity of data from foreign registers.

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made it possible for 89% transactions to be conducted under the simplified FTP procedure. Even though reverse cross-border mergers are often considered as a method for choosing the most favourable corporate law, there were only two downstream mergers involving Polish company, in both cases acting as the acquiring entity. In none of the transactions analysed we saw the rules for sustaining board-level employee representation activated since no such participation existed in Polish companies involved. Neither have we identified cases where appraisal right was made use of by minority shareholders of Polish emigrating (acquired) companies.

5 Summary and Conclusions Providing legal framework for cross-border restructurings is the art of balancing between interests of those involved therein and hence an attempt to reconcile flexibility with protective paradigms. As long as the EU lawmaker has limited its intervention to minimum harmonization with and members states remained free to gold plate, mismatches, gaps and overlaps are virtually impossible to be avoided. This is now being changed through a shift towards full harmonization with the revision of the CBMD in the European legislative pipeline.28 The said difficulties with interoperability between different legal systems limit the efficiency of the legal framework. Consequently, the transactions are mostly executed as intra-group mergers. Empirical evidence from Poland strongly supports this finding. It is difficult to clearly assess the rules on cross-border mergers of companies in Polish law. Undoubtedly, it is the most extensive and the only (apart from SE regulations) set of rules for the international corporate restructuring procedures in Poland so far. However, it should be noted that the EU model of regulating crossborder mergers has been designed with a view of facilitating mergers of companies with a dispersed shareholding structure and hence so much emphasis is placed on providing relevant information to shareholders. Meanwhile, in the Polish ‘insider’ corporate governance system companies are usually controlled by a small group of shareholders or even one single shareholder. Another common feature of the Polish corporate system is a frequent existence of corporate groups based on crossshareholdings creating the so-called ‘pyramid’ or ‘cascade’ structure of corporate ownership. Therefore, it would have been wise in the process of implementing EU law provisions on cross-border mergers to adequately mitigate this dichotomy and adjust the national rules to the factual situation, specifically the ownership patterns as are commonplace in Poland (concentrated ownership). It seems that relatively little has been done in that regard as exemplified by the lack of regime facilitating some

28

Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (Text with EEA relevance), COM(2018) 241 final, 2018/0114(COD) (25.4.2018).

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forms of intra-group reorganisations, such as a merger of “sister-companies” or triangular mergers. One positive point is the introduction of shareholders’ right to exit a company in the wake of reincorporation to a different jurisdiction. This is at the expense of the legal possibility to challenge the decision on the merger. In addition, FTPs vastly contribute to the efficient conduct of cross-border operations. Some shortcomings in the current regime need to be pointed out too. The role of an independent expert is of little importance and doubtful even from the point of view of protecting the interests of minority shareholders. The manner of appointing, remunerating and the lack of clear determination of the independence requirements means that in many cases it will be a person largely dependent on the majority shareholder of a company involved in a merger. At the same time, the rules of liability of the expert are vague and the burden of proof rests on the shoulders of the aggrieved person. Consequently, the presence of an independent expert in the merger procedure is a mere ‘threshold of decency’ protecting mostly against cases of fraud rather than safeguarding entire fairness. Finally, it is worth referring to the matter that has already been mentioned, namely the types of mergers that can be carried out under Polish law. Triangle and sideways mergers facilitate, in particular, achievement of aims set in holding structures. Even though, there are clearly some transactions amounting to this sort of restructurings, they are not foreseen in Polish company law. This loophole leads to inefficiencies causing additional costs in some transactions, which could be avoided or reduced trough the introduction of appropriate frameworks concerning mentioned types of mergers. Therefore, it is necessary to extend the “menu” of cross-border mergers for Polish companies through appropriate legislative amendments. Acknowledgements Ariel Mucha wishes to thank for financial assistance of the Alexander von Humboldt Foundation on the research stay at the Julius Maximilian University of Würzburg (Germany). Arkadiusz Radwan would like to thank Thomas Papadopoulos for the invitation to speak at the conference “Cross-border Mergers Directive: EU perspectives and national experiences” (University of Cyprus, Oct. 7th, 2017) and conference participants for discussion and valuable comparative insights. The author also acknowledges that the credit for the empirical analysis should solely go to his co-author Ariel Mucha.

References Andersen PK, Sørensen EJB (2013) The Danish Companies Act. A modern and competitive European Law. Djoef Publishing, Kopenhagen Biermeyer T (2015) Stakeholder protection in cross-border seat transfers in the EU. Wolf Legal Publishers, Oisterwijk Biermeyer T, Meyer M (2018) Cross-border corporate mobility in the EU: empirical finding. Available at: https://ssrn.com/abstract¼3116042 Gerner-Beuerle C, Mucciarelli FM, Schuster E, Siems M (2017) Cross-border reincorporations in the European Union: the case for comprehensive harmonisation. J Corp Law Stud 18(1):1–42. https://doi.org/10.1080/14735970.2017.1349428

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Lombardo S (2009) Regulatory competition in company law in the EU after Cartesio. Eur Bus Organ Law Rev 10(4):627–648. https://doi.org/10.1017/S1566752909006272 Mucha A, Oplustil K (2018) Redefining the freedom of establishment under EU law as the freedom to choose the applicable company law: a discussion after the judgment of the Court of Justice (Grand Chamber) of 25 October 2017 in Case C-106/16, Polbud. Eur Company Financ Law Rev 15(2):270–307. https://doi.org/10.1515/ecfr-2018-0010 Oplustil K (2015) In: Bieniak J et al (eds) Kodeks spółek handlowych. Komentarz. CH Beck, Warsaw Radwan A (2016) Ius dissidentium. Granice konsensusu korporacyjnego i władzy większości w spółkach kapitałowych. CH Beck, Warsaw Rodzynkiewicz M (2016) In: Opalski A (ed) Kodeks spółek handlowych. Tom IV. Łączenie, podział i przekształcenia spółek. Przepisy karne. Komentarz. Art. 491-633. CH Beck, Warsaw Romanowski R, Opalski A (2009) Nowelizacja Kodeksu spółek handlowych w sprawach transgranicznego łączenia się spółek kapitałowych. MOP Special 14:1–23 Siems M (2008) European directive on cross-border mergers: an international model? Columbia J Eur Law 11(1):167–186 Szumański A (2009) In: Sołtysiński S et al (eds) Kodeks spółek handlowych. Komentarz, vol 4. CH Beck, Warsaw Weimer J, Pape J (2008) A taxonomy of systems of corporate governance. Corp Gov 7(2):152–166. https://doi.org/10.1111/1467-8683.00143 Wroniak M et al (2012) Cross-border reorganization in Poland. In: Vermeylen J, Vande Velde I (eds) European cross-border mergers and reorganisations. Oxford University Press, Oxford

Ariel Mucha has a PhD in business law from Jagiellonian University in Kraków (2019) and is senior researcher at Allerhand Institute of Advanced Legal Studies in Kraków (Poland). His work focuses on the corporate mobility from a legal and economic perspective. He was conducting a research stay in Würzburg (Germany) thanks to financial assistance of the Alexander von Humboldt Foundation (2018). Ariel Mucha earned a master’s degree in Law in 2013 and postgraduate degree in American and British law from Jagiellonian University between 2015 and 2017. Ariel was also authorised advisor on Alternative Trading System at Warsaw Stock Exchange for 4 years. Arkadiusz Radwan Director of the Polish Academy of Sciences - Scientific Centre in Vienna, Austria; Professor at Vytautas Magnus University, Kaunas, Lithuania; Professor at University of Social Sciences, Łódź, Poland; President of the Allerhand Institute, Poland; Co-Director of Center for Company Law & Corporate Governance at Babeș Bolyai University of Cluj, Romania; Attorney-at-Law, of counsel at Kubas Kos Gałkowski. Advisory Board member of CECL, 2014–2017 member of ICLEG—an expert group established by the European Commission to work on company law reforms in the EU. In 2014, head of a team working on a study project dedicated to the Europeanization of Ukrainian company law. 2010 through 2014 and again from 2016 member of expert teams under framework contracts to provide external expertise for the European Parliament on company law and corporate governance. More at ArkadiuszRadwan.pl.

The Mutual Influence Between Cross-Border Merger and Common Merger Regimes in Spanish Law Alfonso Martínez-Echevarría

Abbreviations Commercial Code Council Regulation (EC) 2157/2001

Directive (EU) 2017/1132

Directive 2001/86/EC

Directive 2005/56/EC

Law 31/2006

LME LSC

Royal Decree of August 22, 1885 approving the Commercial Code Council Regulation (EC) n 2157/2001 of 8 October 2001 on the Statute for a European Company (SE) Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies Law 31/2006, of 18 October, on the involvement of employees in European public limited-liability companies and European cooperatives. Law 3/2009, of 3 April, on structural amendments of commercial companies Royal Legislative Decree 1/2010, of 2 of July, approving the consolidated text of the Law on Limited Liability Companies

A. Martínez-Echevarría (*) University CEU San Pablo, Madrid, Spain e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_22

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Royal Decree 1784/1996, of 19 July, approving the Business Register Regulation European public limited-liability company or Societas Europaea

1 The Regulatory Framework for Intra-Community CrossBorder Mergers Under Spanish Law In Spanish legislation, the system for cross-border mergers is primarily contained in Law 3/2009, of 3 of April, on structural amendments of commercial companies— Ley de Modificaciones Estructurales (hereinafter, LME).1 Recital 1 of the Preamble of LME states that one of the objectives of the law is to transpose Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (hereinafter, Directive 2005/56/EC). Directive 2005/56/EC is repealed with the enactment of the Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (hereinafter, Directive (EU) 2017/ 1132). However, Directive (EU) 2017/1132 does not aim to reform company law but to order and codify the content of the six most frequently amended Community directives on this matter, including the Directive on cross-border mergers.2 In response to the new scenario created by the repeal of the former Directive (Directive 2005/56/EC), the new Directive (Directive (EU) 2017/1132) introduces a peacekeeping measure that makes things a lot easier by stating in article 166 that all references to “repealed Directives shall be considered to apply to this Directive in accordance with the correlation table contained in annex IV”.3 The cross-border mergers system is treated in a piecemeal fashion inside the text of the LME. This fragmentation is one of the first elements that we would like to highlight, as the articles in Chapter II of the LME titled Intra-Community Crossborder Mergers (arts. 54–67 LME), do not regulate everything related to this

1

See Mambrilla (2009), pp. 907–911, which discusses the different versions of LME during the legislative procedure or the approval process: proposed preliminary draft law on structural amendments of companies of 3 April 2006; preliminary draft law on structural amendments of companies, approved by the Council of Ministers in June 2007, and draft law on structural amendments of companies of 30 May 2008. There are several opinions and reports relating to this regulation, owing to its importance and complexity. These include the Opinion of the Economic and Social council of Spain of 26 July 2007; the Opinion of the Spanish Council of State; the Opinion of the Official College of Property and Mercantile Registrars of Spain and the report of the General Notary Council—see Mambrilla (2009), p. 908, note 224. 2 Recital 1 Directive (EU) 2017/1132, which lists the six directives. 3 This table links each article of the EU Directive 2017/1132 with the corresponding article of the repealed directive, which it replaces.

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corporate transaction. An integration of the system can be achieved by following the indications of article 55 LME, which states that the articles of the LME governing mergers in general are supplementarily applicable to all aspects of cross-border mergers not treated in articles 54–57 of the said law.4 This is a consequence of the design of Directive 2005/56/EC as a minimum directive: it contains only those norms with substantive content that are considered to be indispensable, along with conflict rules to ensure that everything that is not regulated in the Directive is covered in the regulation of the Member States.5 Article 27.2 LME contemplates the coexistence of three different cross-border merger regimes6: (1) the intra-Community cross-border merger regime—covered in Chapter II, arts. 54–67; (2) (related to the first regime) a regime for mergers that lead to the creation of a European public limited-liability company or Societas Europaea (hereinafter, SE); (3) a regime for other cross-border mergers, either non-EU mergers or mergers of non-limited liability companies. The application of the LME in any of these cases should be interpreted as an enabling regulation, that is, one which makes it possible to perform operations that prior to the regulation were not allowed or had to be performed in a far more complex way.7 As the regulations on cross-border mergers in Directive 2005/56/EC are aimed at limited liability companies, the regime that covers them in Spanish law must be supplemented with the Royal Legislative Decree 1/2010, of 2 July, approving the consolidated text of the Law on Limited Liability Companies—Ley de Sociedades

4

The legal framework has been harmonized as both the LME and the Law on Limited Liability Companies include the transposition of EU law with regard to company mergers. See Cabanas (2015), p. 405. 5 See Mambrilla (2009), p. 882. The system of cross-border mergers contained in the LME has a close precedent in the Proposal for a Companies Code, approved on 14 March 2006 by the Commercial Law Section of the General Commission of Codification inside the Ministry of Justice—see, for a brief commentary, Tapia (2009), p. 823. 6 See also arts. 54 and 56.2 LME. 7 Cf. González-Meneses and Álvarez (2013), p. 303; Tapia (2009), p. 811.

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de Capital (hereinafter, LSC).8 The LSC regulates aspects pertaining to the regime of limited liability companies, that supplement what is set out in the LME.9 The various inscriptions in the Business Register required by law are a central part of merger procedure in Spain. In this regard, it is important to highlight the role within the regulatory framework of Royal Decree 1784/1996, of 19 July, approving the Business Register Regulation—Reglamento del Registro Mercantil (hereinafter, RRM). When an intra-Community cross-border merger leads to the creation of a SE, the following regulations will be applicable: Council Regulation (EC) n 2157/2001 of 8 October 2001 on the Statute for a European company (SE) (hereinafter, Council Regulation (EC) 2157/2001); Title XIII of the LSC, on European public limitedliability company (SE)—particularly articles 467–470, which govern the creation of such companies via a merger—and Law 31/2006, of 18 October, on the involvement of employees in European public limited-liability companies (SE) and European cooperative societies (hereinafter, Law 31/2006).10 In addition to these basic regulations relating to company law, the legal framework governing intra-Community cross-border mergers should also include regulations relating to Competition Law. The merger is classified as an economic concentration operation in Council Regulation (EC) n 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation). The system established for the supervision of economic concentrations in

8

This norm regulates three types of commercial companies that operate in Spain: the sociedad anónima, the sociedad de responsabilidad limitada and the sociedad comanditaria por acciones. The sociedad anónima is the Spanish equivalent of a UK public company, while the other two types are roughly correspondent to private companies. This norm repeals and consolidates previous regulations governing these types of companies: with regard to the sociedad anónima, the Royal Legislative Decree 1564/1989, of 22 December, approving the consolidated text of the public companies law, and title X (articles 111–117) of Law 24/1988, of 28 of July, on the stock market, relating to listed companies, except for sections 2 and 3 of article 114 and articles 116 and 116 bis— which have been replaced by the Royal Legislative Decree 4/2015, of 23 October, approving the consolidated text of the Stock Market Law; with regard to the sociedad de responsabilidad limitada, the Law 2/1995, of 23 March, on private companies, and with regard to the sociedad comanditaria por acciones, section 4ª of title I of book II (articles 151–157) of the Commercial Code of 1885 (hereinafter, Commercial Code). This Commercial Code is still in force today in Spain, although the approval of the preliminary draft of the Mercantile Code 30th May 2014 is currently being discussed in the Spanish Parliament. 9 We can cite among others article 160 LSC, which establishes the general meeting’s power to adopt a merger agreement; article 194 LSC, on the enhanced quorum required when the agenda for the general meeting includes a vote on whether to adopt the merger agreement; or article 199 LSC, which establishes the qualified voting majority, required to approve the merger agreement. 10 Result of the transposition of Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees (hereinafter, Directive 2001/86/EC).

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this regulation and in matching regulations is thus applicable to intra-Community cross-border mergers.11

2 The Aim of Directive 2005/56/EC, on Cross-Border Mergers of Limited Liability Companies We will examine the aim of Directive 2005/56/EC from two perspectives: firstly, we will discuss the objectives themselves; secondly, we will discuss the means that are employed and the attitudes that are adopted when trying to reach them. Directive 2005/56/EC seeks to contribute to the cooperation and consolidation between companies from different Member States, which is sometimes the only way to meet the challenges posed by an increasingly competitive market.12 Prior to the enactment of this directive, limited liability companies that wanted to implement a cross-border merger had to contend with both legislative and administrative difficulties. The rules and regulations contained in Directive 2005/56/EC and transposed in Spain in the LME aim to facilitate cross-border merger operations involving limited liability companies.13 Moreover, the removal of existing barriers in such merger processes14 is one further step towards consolidating and shaping the European internal market.15 Directive 2005/56/EC also aims to enhance freedom of establishment, as cross-border intra-Community mergers are one of the ways, obviously not the only one, of moving the registered office to another Member State. The freedom of establishment benefits not only from the solid regulatory support provided by this directive but also from jurisprudence: the enactment of Directive 2005/56/EC coincides with a moment in which the Court of Justice of the European Communities, leaving behind a period of uncertain jurisprudence on this matter,16 has just ruled unequivocally in favour of the right to free movement, in the case of a 11 The main Spanish regulation governing this matter is Law 15/2007, of 3 July, on Competition Protection, article 7.1.b of which also defines the merger as economic concentration. Article 8.2 of this law sets out that concentrations “with a Community dimension as defined in Council Regulation (EC) n 139/2004” will not be subject to the supervision of the Spanish authorities, as it will come under the jurisdiction of the European Commission. 12 See Sequeira (2006), p. 1511. 13 Recital 2 Directive 2005/56/EC; Recital 1 LME. 14 See European Central Bank (2008), pp. 67–69, which, speaking about “Cross-Border Bank Mergers & Acquisitions and Institutional Investors”, refers to different types of legal barrier. On top of these, there are also political barriers. Thus, shortly before and after the enactment of Directive 2005/56/EC, a number of business concentration operation failed in Spain primarily because of the actions of the governments of the States involved: in 2005, the takeover bid of the Spanish bank BBVA over the Italian bank BANCA NAZIONALE DEL LAVORO; in 2006, the merger attempt between the Italian company AUTOSTRADE and the Spanish company ABERTIS and the takeover bid of German energy company EON over the Spanish ENDESA. 15 Recital 1 of Directive 2005/56/EC. 16 See Mambrilla (2009), pp. 881–882; Martí (2006), p. 301; Sequeira (2006), p. 1511.

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cross-border merger between a German company (SEVIC Systems AG) and a Luxembourgian company (Security Vision Concept, SA).17 With regard to the means employed and the attitudes adopted to reach its aims, Directive 2005/56/EC focuses on guaranteeing the protection of the rights of members, employees and creditors of the companies participating in the merger,18 as we will see when we analyse its set of norms in the following sections.

3 Alternative Methods to Cross-Border Mergers: The Arrangement There are alternative methods to cross-border mergers which allow companies to achieve similar aims; primary among these is gaining control of a foreign company. One well-known and well-studied means of achieving this aim is the takeover bid, an option that is restricted to listed companies. It is worth our while to devote some attention to a less known procedure, the arrangement,19 which has enabled Spanish companies to carry out cross-border operations, both inside and outside the EU. From the point of view of its effects, this operation, which gives rise to a forced exchange of shares, bears a close resemblance to a merger through acquisition and can thus be called improper acquisition or de facto acquisition.20 Within the EU, examples of de facto acquisitions include that of BANCO SANTANDER SA over the British banks ABBEY NATIONAL BANK PLC in 2004 and ALLIANCE & LEICESTER in 2008, and that of the Spanish electrical company IBERDROLA SA over SCOTTISH POWER in 2007. These operations were conducted in accordance with the scheme of arrangement, regulated in the UK by the Companies Act of 1985,21 in the case of the first operation and by the Companies Act of 2006,22 in the case of the other two. The operation takes place in three phases.23 In the first phase the boards of directors of the participating companies calculate and agree on the requirements and circumstances for the exchange of shares. In the second phase, the British company that is due to hand over 100% of its shares, to be acquired de facto, holds two successive general 17

Judgment of the ECJ of 13 December 2005 in Case C-411/03, SEVIC Systems AG. See Birkmose (2005), pp. 55 et seq.; Papadopoulos (2012), p. 525; Papadopoulos (2011), p. 71; Siems (2007), pp. 307 et seq. 18 See Tapia (2009), p. 810. 19 See Davies and Worthington (2012), pp. 1105 et seq. See Enriques (2013), pp. 556–557, where the author proposes the introduction, at the EU level, of a new business combination form to facilitate cross-border acquisitions via a “compulsory share exchange”. 20 See Tapia (2007), pp. 72 et seq.; Tapia (2009), p. 813. 21 Secs. 425 and 426 Companies Act 1985. 22 Secs. 895–899 Companies Act 2006, since modified. 23 See Davies and Worthington (2012), pp. 1108–1113.

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meetings. In the first meeting, which is called by the competent court, the operation and, specifically, the exchange of shares, must receive the approval of at least 75% of the company’s capital. In the second meeting, the capital decrease is approved via the total redemption of company shares and the simultaneous capital increase through the issuing of new shares to the Spanish company that is in effect taking over or acquiring the company in question. In the third phase, the company that is taking over the other one holds another general meeting in which it agrees to increase its capital by issuing new shares which are handed to the shareholders of the company that is in effect being taken over or acquired. Similar operations have also occurred outside the EU, such as the BANCO DE SANTANDER SA’s acquisition of SOVEREIGN BANCORP INC, in 2009. In this case, the procedure is called statutory share exchange, and is regulated in this particular instance by sections 3.1-717 and 3.1-718 of the Virginia Stock Corporation Act.24

4 The Concept of Intra-Community Cross-Border Mergers. An Objective Delimitation and, Above All, a Subjective One There is both a broad and a narrow definition of intra-Community cross-border merger.25 The broad definition covers both mergers which lead to the creation of a SE and those which create a limited liability company governed exclusively by the national law of the State in which it is registered—unlike the former which is governed by both national and Community law (art. 9 Council Regulation (EC) 2157/2001).26 The narrower definition refers only to the latter type of merger, which is regulated in Directive 2005/56/EC and in Chapter II Title II of LME. From a doctrinal perspective, we consider the broader definition to be the correct one. Directive 2005/56/EC and LME simply do not deal with the merger system that leads to the creation of a SE, because this is already covered by its country-specific

24

The Virginia Stock Corporation Act is part of the 1950 Code of Virginia, namely Chapter 9 “Virginia Stock Corporation Act”, of Title 13.1 “Corporations”. 25 See Tapia (2009), pp. 826–827. 26 We prefer to use the phrase “governed exclusively by national law” rather than “by domestic or national”, to differentiate between these companies and European public limited-liability companies, as the latter is also domestic or national as it has the nationality of the state in which it is registered. There is no such thing as a European or Community nationality, neither for natural persons nor for legal persons. Thus, the term domestic or national is also attributable to the European public-limited liability company and does not distinguish this type of company from other types.—see Martínez-Echevarría (2005), pp. 157–162, with regard to a mixed national and international legal framework and pp. 167–172, with regard to its nationality.

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regulations,27 but conceptually the process of establishing a SE fits into the broad category of intra-Community cross-border mergers. The concept of intra-Community cross-border merger contained in article 56 LME is a special category within the concept of common merger.28 Article 22 LME contains the usual concept of a merger and conceives of it as an operation in which two or more registered trading companies are integrated into a single company via a universal transfer of assets and by issuing to the members of the disappearing companies shares or holdings of the resultant company, which may either be a newly-created company or the company participating in the merger that acquires the other company or companies involved. Departing from this concept, article 54 LME states that an intra-Community cross-border merger is one in which the participating companies are limited liability companies created in accordance with the legislation of a State belonging to the European Economic Area with their registered office, central administration or principal place of business inside that State. Furthermore, two of the companies must be subject to the legislation of different Member States and at least one of them must be subject to Spanish legislation.29 Both objective and subjective criteria are required to delimit this concept. From an objective perspective, article 3 Directive 2005/56/EC and article 57 LME, the concept of merger is understood to include operations which allow the exchange of shares or holdings to exceed 10% of the par value or, failing this, the accounting value.30 Subjective criteria play a fundamental role in delimiting the concept of an intraCommunity merger, as they enable us to distinguish mergers of this type from the common merger.31 Thus, from the previously cited article 54 LME we can deduce four conditions that must be met cumulatively by the companies participating in the merger.32 – They must be limited liability companies (art. 54.2 LME): a limited company, a limited liability company or a limited partnership with a share capital. – They must be set up in accordance with the legislation of a Member State of the European Economic Space. – Their registered office, central administration or principal place of business must be inside the European Economic Space.

27

In the Spanish system, title XIII of the LSC—arts. 455–494 and, with specific reference to creating a company through a merger, arts. 467–470—31/2006 and Council Regulation (EC) 2157/2001. 28 See Sequeira (2006), pp. 379–380, which stresses that this concept is similar in many respects to the concept of merger contained in the now repealed Royal Legislative Decree 1564/1989, of 22 December, approving the consolidated text of the Law on Limited Liability Companies. 29 This definition is related to the one contained in article 2.2 Directive 2005/56/EC. 30 See González-Meneses and Álvarez (2013), p. 297. 31 See Papadopoulos (2012), p. 529; Sequeira (2006), pp. 384–387. 32 See González-Meneses and Álvarez (2013), pp. 296–297.

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– When the merger involves at least two companies subject to the legislation of different Member States, one of the participating companies must be subject to Spanish legislation. Furthermore, both Directive 2005/56/EC and the transposition of the Directive in the LME establish which companies are included and which are excluded as potential participants in this type of merger. Spanish companies that wish to be included must be limited liability companies,33 that is, sociedad anónima, sociedad comanditaria por acciones and sociedad de responsabilidad limitada (articles 54.2 LME and 1 and 2.1 Directive 2005/56/EC). Logically, this also includes special types of Spanish trading companies that fit into the generic category of limited liability companies34: the sociedades laborales,35 i.e. companies held by the workforce, the sociedades profesionales,36 roughly corresponding to the concept of professional companies, the sociedades nueva empresa,37 a denomination covering newly established limited companies, the sociedades anónimas cotizadas,38 that is, public companies that are listed on the stock exchange. To determine whether a non-Spanish company can be considered a limited liability company and thus be included as a potential merger participant, it is necessary to refer to the criteria for defining a limited liability company contained in Directive 2005/56/EC.39 With regard to the exclusion of potential merger participants, we can distinguish between explicit and implicit exclusions. Article 56 LME expressly excludes the following companies from participating in intra-Community cross-border mergers: cooperative societies (art. 56.1 LME), sociedades de inversión colectiva—collective investment companies—and companies which the law includes in the latter category (art. 56.2 LME). Companies which do not belong to the category of limited liability company are implicitly excluded. These include sociedades colectivas—regulated in articles 125–144 Code of Commerce—and sociedades comanditarias simples— regulated in articles 145–150 Commercial Code.40 There is no direct equivalent in UK law for either the sociedad colectiva or the sociedad comanditaria simple, but both types of company roughly correspond to the concept of “companies incorporated with limited liability”.

33

The basic regulation is the aforementioned LSC of 2010. See Cabanas (2015), p. 409. 35 Art. 1 Law 44/2015, of 14 October, on employee-owned companies and investee companies. 36 Art. 1.2 Law 2/2007, of 15 March, on professional societies. 37 Art. 434 LSC. 38 Art. 495.1 LSC. 39 Art. 2.1. Directive 2005/56/EC. See Cabanas (2015), pp. 409 and 412. 40 See Tapia (2009), pp. 840–843, which describe companies included under the umbrella term collective investment. 34

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5 The Nature of a Merger Process: Its Hybrid Character It is hard to determine the exact nature of mergers given their complexity. In the first place, it is necessary to clarify if the merger is a single action or a set of actions conceived as a unit. Secondly, it is necessary to determine if the most relevant aspect of a merger is its contractual character or aspects of company law: the contractarian position versus the corporate position. With regard to the first question, there is little doubt that the merger should be conceived as a unitary set of actions, as a complex act,41 a contract with a plurilateral character and a successive formation.42 Its complex character and successive formation are nevertheless ordered: it is developed in the three phases contemplated in the regime governing mergers which were discussed in the previous sections. For this reason, we talk of merger operations and merger procedures. The first term emphasizes economic and contractual aspects while the second highlights procedural and contractual aspects.43 To answer the second question, we would like to refer briefly to a debate held by Spanish jurists in the mid-twentieth century.44 The arguments in favour of the contractarian position or the corporate position interlock with different circumstances that converge in merger operations. These include, on the one hand, the two merger methods—acquisition or the creation of a new company—and, on the other, the importance attached to the internal or external effects of the operation. The contractual nature position is more logical, if we focus on the external effects on company and on mergers that create new companies. By contrast, the corporate nature argument has more weight when considering internal effects and merger through acquisition. Both arguments are partly valid and therefore unsatisfactory. The consensus doctrine is now that merger procedures have a hybrid contractualcorporate character.45 However, the essence or central element of a merger is the contract and the remaining corporate elements are simply a means to an end, that is, instruments that are required in the course of the operation.

41

See Díez-Picazo (1993), p. 77; Girón (1976), p. 367. Cf. Sequeira (1999), p. 202. 43 There are other corporate acts, such as the split, the transformation, capital increase and decrease, which are also classified as complex acts or operations. For a discussion of the capital increase as an operation, see Martínez-Echevarría (2006), pp. 53–57, which also contains references to other works. 44 See, in particular, Motos (1953), p. 22; Girón (1952), p. 620—See, with references to other works, Pérez-Milla (1996), pp. 45 et seq.; Vicent-Chuliá (2008), p. 42. 45 See Mambrilla (2009), p. 860; Trias (2001), pp. 72–73. 42

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6 Types of Intra-Community Cross-Border Mergers Intra-Community cross-border mergers can be classified in two ways: according to the type of company resulting from the merger or according to the type of merger procedure. With regard to the type of company resulting from the merger, we can distinguish between mergers which lead to the creation of a SE which is subject to mixed national and Community legislation and ones that create a company that is exclusively subject to the legislation of one Member State. There are similarities and differences between both types of mergers.46 There is an obvious explanation for the similarities, as the articles of Directive 2005/56/EC refer to some of the juridical solutions which the legislators of Council Regulation (EC) 2157/2001 and Directive 2001/86/EC reached after decades of negotiation and several failed regulation proposals.47 All this juridical experience has been incorporated into the regime for intra-Community cross-border mergers contained in Directive 2005/56/EC. The long negotiation of the set of norms for the SE produced two main results. The first of these is the elimination of the dichotomy between the monistic system and the dual system of company administration. The Statute Proposal of 1970 and 1975 sought to impose the dual model, largely modelled on the German public company—Aktiengesellschaft.48 If the Fifth Directive on company law had been published before the Statute of the SE, the latter would have adopted the solution reached in the former. However,

46

See Tapia (2009), pp. 832–835. See Martínez-Echevarría (2005), pp. 144–153, which discusses in five periods the four decades that elapsed since professor Pieter SANDERS’ speech at Rotterdam University in 1959 proposing the regulation of a European public limited-liability company until the approval of its two regime norms in 2001. The main achievements in this period are the Memorandum composed by Professor SANDERS in 1966; the Regulation Proposal for the European Company Statute in 1970, COM (1970) 600 final, 24.06.1970—Suppl 8/1970 Bulletin EC; the Proposed Statute for European public limited-liability company in 1975, COM (1975) 150 final, 19.03.1975—Suppl 4/1975 Bulletin EC; the Council Regulation Proposal establishing the European Company Statute in 1989 and the Proposal for a Council Directive supplementing the European Company Statute with regard to the position of employees in 1989, both texts in COM (1989) 268 final, 25.08.1989—Suppl 5/1989 Bulletin EC and DO C 263, 16.10.1989; amended Proposal for a Regulation, of 16 May 1991, and amended Proposal for a Directive, of 6 April 1991, COM (1991) 174 final, 6.05.1991, and COM (1991) 174-2, 22.05.1991—DO C 176, 08.06.1991 and DO C 138, 29.05.1991. The last 10 years from the Proposals of 1991 until the enactment of the final version of the Regulation and the Directive regulating the European public limited-liability company were devoted to giving the final shape to the regime governing employee involvement, removing the rough edges to ensure it would not be rejected in States with juridical cultures not used to this practice. 48 In fact, there were more countries with a dual system. To be more precise, at the time at which Council Regulation (EC) 2157/2001 was published, the Member States with a dual model were Austria, Belgium, Denmark, Germany, Italy and Luxembourg; there was a monist system for limited societies in Spain, Finland, Greece, Ireland, Sweden and the United Kingdom there was a mixed or flexible model, corresponding in some measure to the Statute for the European public limited-liability company in France, Holland and Portugal. 47

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things did not turn out this way and the legislators of the SE offered as a solution the free choice between the monist and the dual model. This is established in the Statute Proposals of 1989 and 1991 and in the Council Regulation (EC) 2157/200149 in force today. The second result—and a major conquest—was the solution to the problems posed by the regime of employee involvement in the management of the SE. This had become an obstacle owing to the clash between two different juridical cultures over this matter: the countries which included different ways of involving employees in company management and those which did not contemplate this possibility.50 In 1998, during the British presidency of the Council of the European Union, a major step was taken to avoid a new deadlock in negotiations. The Internal Market Council proposed the so-called before-after principle which was approved by 14 of the 15 States making up the European Union at that time51: if there was no employee participation in the companies participating in the process of creating a SE before the company was created there is no need to organize such participation after its creation; if the companies involved in creating the new company did have employee participation mechanisms before the constitution process, it will be necessary to organize employee participation after the process. Moreover Directive 2001/86/EC establishes different means of obtaining a greater or lesser degree of employee involvement52: information, consultation, participation and other mechanisms.53 The companies involved in the creation of a SE are free to choose any of these means of employee involvement. Articles 3–6 of Directive 2001/86/EC establishes the negotiation procedure that companies must use to agree on which means to use; for the cases in which no agreement is reached, the Directive establishes some reference provisions, which shall be applied as an ancillary measure to ensure employee involvement.54 To avoid non-compliance with the obligation to organize employee involvement, article 12.2 Council Regulation (EC) 2157/2001 lays down that a SE cannot be registered in the business register unless a solution is reached

49

Art. 38.b Council Regulation (EC) 2157/2001. Moreover, the choice between the two models does not depend on the existence or otherwise of a regime regulating employee co-management in the SE in question—see Hommelhoff (2001), p. 282. Regarding the regime for the monist and dual systems contained in LSC 2010, which are applicable to a SE based in Spain, see Martínez-Echevarría (2017a), pp. 779–794; MartínezEchevarría (2017b), pp. 794–805. 50 Employee involvement was regulated in Austria, Denmark, Finland, Germany, Holland, Luxembourg and Sweden. It was not regulated in Belgium, France, Greece, Ireland, Italy, Portugal, and the United Kingdom. 51 See Blanquet (2001), p. 77; Edwards (2003), p. 449. 52 Art. 2 Directive 2001/86/EC. 53 Developed, to regulate the SE based in Spain, in Law 31/2006 cited above. 54 Art. 7 and annex of Directive 2001/86/EC.

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with regard to employee involvement, either a negotiated agreement or the supplementary application of reference provisions.55 Returning to the similarities between the merger process that creates a SE and that which results in a company subject exclusively to national law, we would like to point out that both types aim to achieve maximum transparency throughout the process to protect the interests of members, employees and creditors. The three stages of both merger processes coincide, and their specific regimes contain similar means of providing information and of intervening to protect the rights of members, employees and creditors. As for the differences between these two types of merger, the first is that they are governed by regulations of a different level and nature. Directive 2005/56/EC in no way sets out to replace or repeal the set of norms governing the SE. The creation of this type of company through a merger process is subject to the specific norms cited above—Council Regulation (EC) 2157/2001 and the transposition of Directive 2001/86/EC in each Member State, the repeatedly cited Law 31/2006 in the case of Spain. By contrast, the LME is the transposition of Directive 2005/56/EC and the main norm regulating intra-Community cross-border mergers that are exclusively subject to the laws of one Member State. Another difference, which in a sense is as a limitation on the SE, is that only public companies can participate in the creation of this type of company through a merger.56 By contrast, any type of limited liability company may take part in mergers which lead to the creation of a company subject exclusively to national law. Article 3.2 Directive 2005/56/EC leaves open the possibility of including the cooperative society as a potential participant in the merger process that it regulates. Article 56.1 LME explicitly excludes the cooperative society from the list of potential participants in an intra-Community cross-border merger acquisition. Mergers are classified into two types according to the type of procedure, mergers via acquisition and mergers through the creation of a new company. These two types of merger appear in article 2 Directive 2005/56/EC. LME does not explicitly make this classification in the articles it devotes to the specific regime regulating intraCommunity cross-border mergers (articles 54–67 LME, which make up Chapter II Title II of this law). However, article 55 LME refers to the supplementary provisions governing mergers in general. Article 23 LME categorizes the two merger types, mergers via acquisition and mergers through the creation of a new company. Aspects of intra-Community cross-border mergers are specific to one of these merger types: some relate to legality controls and to inscription in the Business Register (arts. 65.1 and 3 and 66.3 LME), while others concern the separation rights granted to the members of a Spanish company that takes part in a merger that leads to the creation

55

See Fouassier (2001), p. 86. Some authoritative voices are opposed to this limitation imposed by the legislator, as there does not seem to be any justification for restricting the procedure to the public company and excluding other types of limited liability company—see Hommelhoff (2001), p. 280. 56

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of a new company in another Member State (art. 62 LME), or refer to employee involvement rights (art. 67 LME).57 In addition to the two usual merger processes, article 2.2.c Directive 2005/56/EC contemplates a special procedural type, the acquisition of a company wholly owned by the acquiring company.58 Thanks to the reference in article 55 LME to the general regime governing mergers, articles 49 and 51 LME are applicable to intraCommunity cross-border mergers.59 A number of the requirements and procedures of the other types of merger process can be eliminated from this type, as the starting point is actually simpler. For this reason, this type of merger procedure is sometimes called an abbreviated merger. In the recent history of Spanish corporate practice mergers by acquisition have been the most frequent type involving60: acquisition of a Spanish single shareholder company by its parent company based in another Member State61; acquisition by a Spanish company of a subsidiary company in another Member State,62 and some aborted mergers in which a company based in another Member State attempted to acquire an independent Spanish company.63

57

See Tapia (2009), p. 836. “A company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital” (art. 2.2.c Directive 2005/56/EC). 59 These articles form part of section 8ª “On special mergers”, of Chapter II Title II of LME (arts. 49–52). Vid. art. 15.1 Directive 2005/56/EC. 60 See Tapia (2009), p. 836. 61 Acquisition in 2008 of Spanish single shareholder company BETRAND SPAIN SAU by German public company limited by shares BERTRAND AG; acquisition in 2008 of Italian single shareholder company FACI METALEST SLU by Italian public limited liability company FACI SpA. 62 Acquisition in 2004 of Portuguese public company limited by shares TECNOLOGÍAS MÚSICA E AUDIO-ROLAND PORTUGAL SA and Spanish public company limited by shares ROLAND ELECTRONICS DE ESPAÑA SA by Spanish single shareholder company ROLAND IBERIA SLU. At the time of writing, the Spanish listed company BANCO BILBAO VIZCAYA ARGENTARIA SA has initiated an operation of intra-Community cross-border merger by acquisition of its Portuguese subsidiary BANCO BILBAO VIZCAYA ARGENTARIA (PORTUGAL) SA. 63 Failed attempt by Italian listed company ATLANTIA SpA to acquire and merge with Spanish listed company ABERTIS SA. At the time of writing, the Italian listed company ATLANTIA SpA—formerly AUTOSTRADE SpA—and the Spanish listed company ACS SA have launched a joint takeover bid for ABERTIS SA. 58

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7 Regime Applicable to the Intra-Community CrossBorder Mergers. The Continuous Reference to the General Merger Regime to Supplement the Gaps in the LME At the beginning of this study we devoted one section to the legal framework applicable to intra-Community cross-border mergers. From this point on we will study specific aspects of its regime. For this reason, we would like to stress once more its fragmented nature and suggest means of completing or integrating this regime. The general regime for mergers is set out in in articles 22–53 LME. Three phases are distinguished: the preparatory phase, the decision-making phase and the execution phase. The specific regime for intra-Community cross-border mergers is contained in articles 54–67 LME—Chapter II of Title II. These articles only regulate the specific details of this merger procedure, omitting those aspects which are the same as the general merger procedure. Likewise, in the following section, we will only refer to specific aspects of the intra-Community cross-border merger procedure. The key element for integrating the set of norms governing intra-Community cross-border mergers is article 55 LME, which establishes that the provisions governing mergers in general are also applicable to such mergers.64 For this reason, constant reference is made to the regime governing mergers in general during the processing period of intra-Community cross-border mergers. Moreover, the references to article 55 LME are not only restricted to the remaining articles of LME on mergers but also extend to the regulatory provisions applicable to this company creation procedure, that is, to the entire legal framework governing this area.65 One singular aspect of the Spanish legislation is that the transposition of Directive 2005/56/EC, incorporates into the general regime for mergers requirements that were originally meant to apply only to cross-border mergers. For this reason, articles 54–67 LME do not contain many specific regulations for intra-Community crossborder mergers. Obviously, as can be deduced from Recital 3 of Directive 2005/56/ EC,66 and as explicitly stated in article 27 LME, these specific details are only applicable to Spanish companies participating in a merger.67 Article 58 LME contains a regulation related to State sovereignty. This article establishes that the regulations which allow the Spanish government to impose conditions on an internal merger for reasons of public interest shall also be applicable to cross-border mergers in which at least one of the participating companies is

64

See Mambrilla (2009), p. 902; Tapia (2009), p. 844. Which goes well beyond the selection of norms that were highlighted above. 66 “(U)nless this Directive provides otherwise, each company taking part in a cross-border merger, and each third party concerned, remains subject to the provisions and formalities of the national law which would be applicable in the case of a national merger”. 67 See González-Meneses and Álvarez (2013), p. 297. 65

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subject to Spanish legislation. In particular, these regulations may come from the sectorial regulations applicable to mergers involving companies devoted to specific business activities—such as the finance sector or the energy sector.68 The provision contained in article 58 LME has one exception: the Spanish government may not impose the conditions applicable to an internal merger, when, in application of article 21 Council Regulation (EU) n 139/2004, permission has been granted to perform a merger with a Community dimension.69

8 The Preparatory Phase of a Merger The purpose of actions carried out in this phase is to enable the adoption of a merger agreement at a later stage and to protect the interests of people involved in the process or affected by it. In this phase the draft terms of the merger are drawn up with sufficient financial information and other information pertaining to the participating companies to perform the merger successfully. The draft terms of merger are published so that stakeholders may oppose it or demand amendments if it adversely affects their rights. Moreover, the managers—i.e. directors or members of management or administrative organs—of the participating companies and independent experts write reports on the draft terms of the merger.

8.1

Common Draft Terms of Merger: The Possibilities of Modifying Them in Spanish Merger Legislation

Article 59.1 LME establishes that the managers of each of the companies involved in the intra-Community cross-border merger must draw up the draft terms of merger equivalent to the one required in articles 30–31 LME for the general merger.70 The draft terms of merger must be written in Spanish and in the other languages stipulated in the legislations that are applicable to the participating companies.71 It is important to emphasize that this is a single set of draft terms of merger, which means that any specific requirements applicable in the legislations of other Member States must be incorporated into the common draft terms of the merger and that, if necessary, any formal requirements laid out in the set of norms of the Member State that demands these requirements must be complied with. The law seems to allow for the possibility that non-essential regulations required only in the legislation of one Member State are only included in the version of the draft terms of merger that is 68

This is set out in article 29 LME. See Cabanas (2015), p. 488; Tapia (2009), p. 846. 70 See Cabanas (2015), pp. 418 et seq. 71 See Cabanas (2015), p. 423; Mercadal (2015), p. 108. 69

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made available to the members of the company in question.72 We will return to this question when we discuss how to publish the draft terms of merger. The specific details pertaining to the intra-Community cross-border merger are discussed in article 59.2 LME. The first of these establishes the need to include the particular advantages of the draft terms of the merger noted by the experts who have studied it and by members of administrating, managing or controlling organs of the companies involved in the merger. The reference to different types of organs has been included above all for the benefit of the non-Spanish companies participating in the merger, as, except in the case of European public limited-liability companies based in Spain, Spanish legislation does not contemplate managing or controlling organs. The second refers to the need to include when applicable information regarding employee involvement procedures in the company resulting from the intraCommunity cross-border merger.73 In addition, article 57 LME establishes an authorization related to the exchange ratio and the possibility that the exchange may include cash payments: the merger will be viable even if the legislation of one of the Member States involved allows cash payments to exceed 10% of either the par value or, failing that, the accounting value of the shares or holdings that are exchanged. In the case of the abbreviated merger, also known as acquisition of a company wholly owned by the acquiring company, if the operation has an intra-Community dimension, article 49.1.1 LME expressly states that the requirements set out in article 31.9ª LME—valuation of the assets and liabilities of the acquired company— and article 31.10ª LME—dates of the accounts of the participating companies, used to establish the conditions in which the merger is performed—cannot be waived. Article 49.1.2 LME further establishes that managers reports cannot be dispensed with in intra-Community cross-border abbreviated mergers.74 The first version of article 50 LME, written in 2009, also established that reports of the members of the administrative organs cannot be dispensed with either in the case of intra-Community cross-border partially abbreviated mergers, that is mergers in which the acquiring company owns 90% of the acquired company in another Member State. However, this article has subsequently been amended on four occasions. The current version of article 50.1 LME establishes that reports of the

72

See González-Meneses and Álvarez (2013), p. 299. Article 59.2.2ª LME refers to article 67 LME, which covers more issues relating to employee implication rights in the resultant company; article 67 in turn refers to Law 31/2006, which provides extensive regulation on this issue. As we have discussed, on the one hand, it is important for employees to intervene in the procedure that will regulate their future involvement in the management of the resultant company; on the other hand, it is important to decide on the type of involvement that will be employed, participation, information, consultation or other mechanisms. As noted above, each of these types generates different degrees of involvement. 74 See González-Meneses and Álvarez (2013), p. 299; Mambrilla (2009), p. 911. 73

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members of the administrative organs can be dispensed with. However, other measures have been introduced to protect members’ interests.75 In the Spanish legal system, the regime for general mergers establishes an important measure relating to common draft terms of merger that is applicable to intra-Community cross-border mergers and does not exist in other Member States. It involves the possible obligation to modify the draft terms of merger in specific circumstances. The reasoning behind this measure is that the draft terms of merger are merely a preparatory step within the merger process. At the same time the content of the draft terms of merger document is instrumental in determining the success or failure of a merger. For this reason, it is vital to ensure that the information provided in the document is both accurate and true. In response to this need, article 39.3 LME establishes that managers are obliged to modify the content of the draft terms of merger when the information relating to the valuation of assets or liabilities of the participating companies (which must be transmitted to the company resulting from the merger in order to comply with article 31.9ª LME) is no longer accurate, as the assets or liabilities have undergone substantial changes between the writing of the draft terms of merger and the general meeting held to approve it.76 The managers of the company that has undergone the changes are legally liable for the failure to make such amendments. They must transmit the modifications to all the companies involved in the merger, so that they, in turn, can communicate the changes in their board meetings (art. 39.3 LME). The need and obligation to modify the draft terms of merger must be reconciled with the need to ensure that the text of the common draft terms of merger used by each participant is identical in all essential aspects. Article 5 Directive 2005/56/EC, which specifies the minimum content that management or administrative organs must include in the common draft terms of merger, is the point of departure for ensuring that these essential aspects of the text are identical. Article 6.2 Directive 2005/56/EC which regulates how to publish the common draft terms of merger, admits that there are aspects in which the contents of the draft terms of merger published may differ from one participating company to another.77 However, in its discussion of the scrutiny of the legality of the cross-border merger, article 11 Directive 2005/56/EC and, in very similar terms, article 65.1 LME, insist that the competent authority for conducting the scrutiny “shall in particular ensure that the merging companies have approved the common draft terms of cross-border merger in the same terms”. In line with these stipulations, article 40.1 LME states more

For example, the right to “request from the Business Register corresponding to the registered office of the acquiring company the designation of an independent accounts auditor to determine the fair value of its shares or holdings” (art. 50.2 LME). 76 This modification is of undeniable importance, as it affects other data contained in the draft terms of merger—see art. 31.2ª, 3ª, 4ª and 5ª LME. 77 “For each of the merging companies and subject to the additional requirements imposed by the Member State to which the company concerned is subject, the following particulars shall be published in the national gazette of that Member State: (a) the type, name and registered office of every merging company. . .”—the italics are ours (art. 6.2 Directive 2005/56/EC). 75

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categorically that the merger must be approved “by the meeting of members of each and every participating company and must strictly correspond to the common draft terms of merger”. Given the essential character of the information that must be modified according to article 39.3 LME, this information is part of the essential data that must be identical in the common draft terms of merger presented by each of the participating companies. However, this essential nature underlines the importance of modifying the data to ensure the success of the merger.78 Managers and members of participating companies from Member States that do not contemplate such amendments to the common draft terms of merger may be surprised when the changes are communicated by the company modifying the information. However, once the information has been received, it is easy to understand the ratio legis of this requirement and of the importance and advisability from both a financial and a company perspective, of incorporating into the common draft terms of merger the substantial modification of the valuation of the assets or liabilities of one of the participating companies.

8.2

Publishing the Draft Terms of Merger

Throughout the merger process it is especially important to publish the common draft terms of merger, so that all members and other stakeholders, such as the employees and the creditors are aware of its content. To this end, the common draft terms of merger must be published at least 1 month before the general meeting to vote on the merger agreement (art. 6.1 Directive 2005/56/EC). In this way, members who will attend the meeting have the opportunity to decide on their vote, and both they and all other stakeholders have the opportunity to take the relevant measures to protect their interests before the meeting, if they consider that the draft terms of merger do not protect them. The importance of publishing the draft terms of merger is, if anything, greater in the case of intra-Community cross-border mergers but, paradoxically, the LME contains no provision that expressly and specifically requires it to be published. However, article 32 LME, which regulates this area extensively and in detail, is supplementarily applicable by virtue of the generic reference to article 55 LME. This article establishes the obligation for all mergers not only for intra-Community crossborder mergers to insert the common draft terms of the merger on the web page of each of the companies participating in the merger.79 Consequently, article 32.1 LME 78

See García-Villaverde (1996), pp. 203 et seq. The obligation to publish on the web page of the merging companies was established for intraCommunity cross-border mergers in the reform of article 6 Directive 2005/56/EC made by Directive 2009/109/EC of the European Parliament and of the Council of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions. See Cabanas (2015), p. 425; Mambrilla (2009), p. 912; Mercadal (2015), p. 109. 79

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establishes that the deposit of the common draft terms of merger in the Business Register is now optional. In the event that the draft terms of merger are deposited, the deposit must be made in the Business Register corresponding to each of the participating companies. The insertion of the draft terms of merger in the web page must be communicated to the Central Business Register, which will then publish it free of charge in the Boletín Oficial del Registro Mercantil—Official Gazette of the Business Register—indicating in which web page it appears. Article 66.2 LME states that the Official Gazette of the Business Register must publish an indication, for each of the merging companies, of the arrangements made for the exercise of the rights of creditors and of members of the merging companies and the address at which complete information on those arrangements may be obtained free of charge. Article 66.2 LME is almost a literal transcription of the text of article 6.2.c Directive 2005/56/EC and does not distinguish whether this “complete information” is addressed only to the creditors and members of companies subject to Spanish law or to all companies or to all the merging companies. But it should perhaps have restricted the addressees of this information regarding “the arrangements made for the exercise of rights” to the creditors and members of the companies subject to Spanish law, as it is not the business of the Central Business Register to know or provide information about the national laws of the merging companies from other Member States. In this respect, the most reasonable interpretation of article 66.2 LME is that the information addressed to parties connected with the merging companies from other Member States must refer specifically to the rights recognized under their country’s law and generically to the rights of separation, of opposition and to the right to appoint an independent expert to set compensation amounts—rights which appear in articles 38, 44 and 62 LME.80 Although the draft terms of the cross-border merger are common to all merging companies, the draft includes both essential and non-essential content. Article 6.2 Directive 2005/ 56/EC refers to the possibility that Member States may impose upon the companies subject to their legislation the obligation to include “additional requirements”. In this regard it may be interpreted that these non-essential aspects required in some national legislations do not need to be included in the common draft terms of merger published by merging companies from other Member States.81

8.3

Reports from Management or Administrative Organs

At least 1 month before the meeting, the management or administrative organs of the merging companies shall draw up a report explaining the common draft terms of

80 81

See Cabanas (2015), pp. 426–427. See González-Meneses and Álvarez (2013), p. 299.

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cross-border merger (art. 60 LME)82 and their implications for members, creditors and employees (art. 7.1 Directive 2005/56/EC). With regard to the purpose of the report article 60 LME refers to article 32 LME—the article that regulates the report in the regime of the common merger—which expressly states that the report must provide information on the common draft terms of merger. However, it is surprising that no reference is made to the common draft terms of merger in article 7.1 Directive 2005/56/EC,83 as this theoretically leaves too much room for arbitrariness and subjectivity on the part of the members of management or administrative organs and allows the respective reports to express widely differing opinions on the merger in general as opposed to opinions on the content of the common draft terms of merger. The management or administrative organ of each company must make the report available to members and employees. The article that regulates this procedure in the general merger (art. 33 LME) requires that the report be made available to creditors, as well as to members or employees. The omission of creditors from the addressees of the report is an inconsistency that can be traced to article 7 Directive 2005/56/EC, which states in its first paragraph that the report explains the implications of the merger for “members, creditors and employees”, but forgets about creditors in the second paragraph which establishes that the “report shall be made available to the members and to the representatives of the employees or, where there are no such representatives, to the employees themselves”. Some national laws have included creditors in their transposition of Directive 2005/56/EC, but the Spanish law has respected the original text.84 For practical purposes it makes sense to make the text available for any creditor who asks for it. However, should access to the document be denied, the creditor will not be legally entitled to demand to see it. Article 60.2 LME adds that managers shall attach to the report the opinions sent by employee representatives. The regulation is well-intentioned but difficult to apply as after receiving the reports, the employee representatives will normally only have 1 month—occasionally a bit longer—to issue their opinions between the publication of the reports and the general meeting. The opinion will then be added to the report and will only be known by those who consult the report a second time before the meeting.85 The management or administrative organ of each merging company must write a report. This means that there are as many reports as there are merging companies and the opinion expressed by each company may have a different focus because, although the draft terms of the merger are common to all merging companies, the social interest of each company is different. With all this data at their disposal, the

82

With regard to drawing up the report, article 60 LME refers to what is laid down in article 33 LME in relation to the common or general merger. 83 The regulation of the experts’ report in articles 8.2 and 4 Directive 2005/56/EC expressly mentions the common draft terms of merger. 84 See Cabanas (2015), p. 431. 85 See González-Meneses and Álvarez (2013), p. 300.

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members must decide whether or not to vote in favour of the merger in the general meeting. Although Spanish law establishes the liability of the experts with regard to their report (art. 34.4 LME),86 it establishes no such liability for the members of the management or administrative organ that draw up their report. However, it may be interpreted that the liability of the members of the management or administrative organ is included in the legal responsibilities incurred by the failure to comply with the administrative duties set out in articles 225 et seq LSC. As previously noted, the report of the management or administrative organs is obligatory in the abbreviated merger (art. 49.1.2 LME) but may be dispensed with in the partially abbreviated merger (art. 50.1 LME).

8.4

Independent Expert’s Reports

As the LME contains no specific regulation on independent expert reports in intraCommunity cross-border mergers, it is necessary to use the common merger regime (art. 34 LME) as a supplementary reference.87 Both article 34 LME and article 8 Directive 2005/56/EC expressly state that the purpose of the report is to comply with the common draft terms of merger.88 The report must be made available at least 1 month before the date of the general meeting to vote on the merger agreement. The only addressees mentioned in article 8 Directive 2005/56/EC are the members. Although it does not state so explicitly, it is clear that article 34 LME also regards the members as the addressees as it focuses on questions that affect them directly, such as the ratio applicable to the exchange of shares or holdings. There will be as many reports as there are companies participating in the merger. Article 34 LME contemplates the possibility of there being a single common report when so decided by the merging companies. However, the treatment regarding the appointment of an expert or experts in article 34 LME,89 make this alternative hard to operationalize in the case of intra-Community cross-border mergers. In this regard, article 8.2 Directive 2005/56/EC establishes that all companies must designate a judicial or administrative authority from the Member State of every merging company, so that this authority may choose the expert or experts. Article 34 LME has been written with the general merger regime in mind and refers only to the Business Register, the competent administrative authority for the appointment of experts under Spanish law. It does not contemplate the possibility of designating a

86

See Mambrilla (2009), p. 912. The only specific reference to this question is the comment on the possible advantages attributed to independent experts (art. 59.2.1ª LME)—see Cabanas (2015), p. 433. 88 Both articles give an orientative idea of the content of the common draft terms. 89 See González-Meneses and Álvarez (2013), p. 299. 87

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judicial authority, as occurs in other countries, or even that of using a different administrative authority. Moreover, article 34 LME introduces another limitation in this respect: while article 8.2 Directive 2005/56/EC allows the designation of an authority from the Member State of any of the merging countries, article 34 LME only allows the designation of the Business Register of the acquiring company or the newly created company. One singular aspect affecting Spanish sociedades de responsabilidad limitada that take part in intra-Community cross-border mergers is that the general merger regime in Spain does not require from them an experts’ report. However, to strengthen the merger procedure, article 63 LME establishes that sociedades de responsabilidad limitada that participate in a cross-border merger will all be subject to the rules that apply to mergers of sociedades anónimas and sociedades comanditarias por acciones. One of these rules is that there must be an experts’ report.90

8.5

Merger Balance

Neither the Directive 2005/56/EC nor the LME specifically regulate the intraCommunity cross-border merger balance. The only reference to the balance is an indirect one in article 5.l Directive 2005/56/EC, which mentions “dates of the merging companies’ accounts used to establish the conditions of the cross-border merger”. For this reason, it is necessary to use the general merger regime as a supplementary reference with regard to the balance. We should refer in particular to articles 36 and 37 LME, which deal with the closure date for the balance, its verification by auditors, its approval and exceptions in the case of listed companies. It is worth highlighting that the balance from the previous year can be used for the merger if it was closed less than 6 months before the merger date. If more than 6 months has elapsed, it will be necessary to compile an ad hoc balance sheet for the current year (art. 36.1 LME). All the merging companies must provide each other with this accounting information. The balances received from the other merging companies need not be registered in the Business Register (art. 230 RRM). For this reason, the consensus doctrine is that these documents are purely informative in nature and cannot be regarded as official accounting documents with third-party effects.91

90 91

See Cabanas (2015), p. 433; Mambrilla (2009), p. 913. See Cabanas (2015), pp. 439–440.

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9 The Decision-Making Phase of the Merger This phase is the nucleus of the merger: each merging company holds a general meeting in which the members debate and vote on whether or not to approve the common draft terms of the merger.92 In short, each company states whether it wants to go ahead with the merger or not. There are many company procedures that guarantee the proper implementation of this vitally important phase in the merger process. In this respect each company is governed by its personal law (art. 4.2 Directive 2005/56/EC).93 For this reason, there are not many features that are specific to the intra-Community cross-border merger. One of these refers to the participation of employees in the company resulting from the merger. Thus, article 61 LME establishes that the general meeting of each of the merging companies may condition the acceptance of the merger on the express ratification of provisions relating to the participation of employees in the company resulting from the cross-border merger.94 Both article 61 LME and 9.2 Directive 2005/56/EC refer to the “participation of employees in the company”, but it would be more accurate to talk of employee involvement in the company, as the latter term includes not only the participation of employees in the company, but also information, consultation. The agreement reached by each of the merging companies must be published in the countries affected by the merger (arts. 66 and 43 LME), as it must be brought to the attention of company creditors, who may then exercise their opposition rights, if they consider that the merger adversely affects their interests. The exercise of these rights is subject to the national law of each creditor.95 In Spain the agreement must be published in the Official Gazette of the Business Register, which can be accessed on-line—and in one of the newspapers with the greatest circulation in the province of the registered office of each of the Spanish merging companies. The publication of the agreement may be replaced with individual written communication to each of the members and creditors.96

92

Article 9.1 Directive 2005/56/EC stresses that the members must take into consideration the report of the management and administrative organ when forming their opinion. 93 See Cabanas (2015), p. 445; González-Meneses and Álvarez (2013), p. 300; Mambrilla (2009), p. 914. 94 See González-Meneses and Álvarez (2013), p. 300; Mambrilla (2009), pp. 913–914. 95 See González-Meneses and Álvarez (2013), p. 300. 96 See Cabanas (2015), p. 447.

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10 10.1

467

The Execution Phase of the Merger Document Formalization in the Intra-Community Cross-Border Merger

Via article 45 LME, the common merger regime requires the publication of the merger in an official register. However, European law does not make the same requirement for intra-Community cross-border mergers.97 The legislation of the Member States offers a variety of solutions: for example, public notarial deeds are required in both German and French law, while UK law requires judicial rather than notarial documentation.98 In Spanish law, article 45 LME requires notarial deed. Article 45 LME requiring the publication of the merger in an official register is applicable via the reference to the general merger regime in article 55 LME. As we will see, the merger must be registered in the Business Register (arts. 18.1 Commercial Code and 5 RRM). However, different solutions are provided depending on whether the resulting company—regardless of whether it is an acquiring company or a new company—is subject to Spanish legislation or to that of another Member State99: – If the resulting company is subject to Spanish law, it must publish the merger in an official register, the Business Register. – If the resulting company is subject to the law of another Member State, the relevant national law will determine the nature of the document formalization process.

10.2

Registration in the Execution Phase of a Merger and the Need to Resort to Conflict Rules

Juridical acts relating to registration play a key role in the execution phase of a merger. In the intra-Community cross-border merger, this requires both coordination efforts and interpreting skills, because, although some progress has been made, regulatory harmonization of business registration legislation in European law is still insufficient.100 During the long period devoted to preparing the regulations governing the SE, the need arose to regulate the European central business register

97

See Fernández-del-Pozo (2009), p. 948; González-Meneses and Álvarez (2013), p. 301. See Fernández-del-Pozo (2009), p. 948. In Delaware law it is sufficient for the document to be recognized without notarial authentication—ibidem, pp. 948–949. 99 See Fernández-del-Pozo (2009), pp. 949–950. 100 See Fernández-del-Pozo (2009), p. 929. 98

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as well.101 However, the difficulties associated with this aim soon became clear and it was postponed. We would now like to discuss some aspects of international business register law, as they offer solutions to the problems that arise in this phase of the intraCommunity cross-border merger.102 Just as there is a lex societatis governing each of the companies that take part in an intra-Community cross-border merger, there is a registral law, which is the set of substantive and formal regulations governing their right to register in one or more specific business registers—or an equivalent institution. The fundamental aspects which registral law addresses are: (a) the right of an entity to register; (b) the contents of registration publicity; (c) the territorial jurisdiction of public registry offices; (d) registration requirements—including the formalization of the document to be registered, as discussed above; (e) the effects of registration, and (f) registration procedure.103 In accordance with the principles of international private law, registral law rules are mandatory rules, and are therefore only applicable within the territory of the State that enacts the law.104 Thus, in intra-Community cross-border mergers the rules of Spanish registral law are only applicable to entities that “are located on Spanish territory” (art. 8.1 Commercial Code), meaning: – Companies subject to Spanish Law; – Foreign companies and business persons subject to non-Spanish legislation, and registered in a foreign public register, who operate on Spanish territory through a subsidiary office (arts. 15 Commercial Code and 295 et seq RRM).105

10.3

Issuing Pre-merger Certificates

Article 10 Directive 2005/56/EC regulates the pre-merger certificate to address the differences that exist on this question in the national law of the Member States. It states that “each Member State shall designate the court, notary or other authority competent to scrutinise the legality of the cross-border merger as regards that part of the procedure which concerns each merging company subject to its national law”.

101

This proposal was included in the Proposal for a Regulation on the Statute for a European public limited-liability company, of 30 June 1970. 102 We would first like to define the concept of international business register law: the term refers to that part of conflict law—or of international private law—that deals specifically with the problems created by the registry in the corresponding national registry office of business persons—natural or juridical—involved in international trade—see Fernández-del-Pozo (2009), p. 929. 103 See Fernández-del-Pozo (2009), pp. 929–930. 104 See Sancho (2001), p. 244. 105 See Fernández-del-Pozo (2009), pp. 930–931.

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Spanish national law assigns this function to the Business Register.106 Article 64 LME establishes that the business registrar corresponding to the registered office of each merging company subject to Spanish national law will analyse the data that appear in the Business Register and in the public deed related to the merger and will without delay107 issue the company a certificate confirming the proper implementation of the acts and procedures prior to the merger.

10.4

International Registry Classification or the Scrutiny of the Legality of the Intra-Community Cross-Border Merger

The next stage after the issuing of the pre-merger certificates is the scrutiny of the legality of the intra-Community cross-border merger, a fundamental step in the intra-Community cross-border merger. As occurs with the pre-merger certificates, article 11 Directive 2005/56/EC departs from the premise that there are many differences between the national juridical regime of each country; for this reason, it establishes that each Member State must designate the competent court, notary or other authority to perform this scrutiny. The competent national authority corresponding to the registered office of the company resulting from the merger assumes the coordination of this crucial part of the merger process. Spain entrusts the Business Register with this task (art. 65 LME). This scrutiny of legality has two functions: on the one hand, it is the last means of controlling that all the necessary parts of the merger procedure have been properly implemented; on the other hand, it serves to coordinate all the Business Registers— or competent national authorities—both inside each Member State—as there may be different companies from the same Member State—and internationally.108 Article 65 LME establishes that the business registrar corresponding to the resulting company’s registered office will scrutinize the entire merger operation. In this respect (s)he must examine data and matters relating to both the disappearing companies and the resulting company.109 With regard to the disappearing companies: 106

See Mambrilla (2009), p. 912. It is understandable that the Community legislator did not fix a specific period for this certification, opting instead for the expression “without delay” in article 10.2 Directive 2005/56/EC, as the diverse regimes of the different Member States make it difficult to establish a more specific time limit. Article 64 LME uses the same flexible term, “sin demora” (without delay), in its transposition of the Directive. This is also comprehensible but in a national law such vagueness generates legal uncertainty. 108 See Davies and Worthington (2012), p. 1119; González-Meneses and Álvarez (2013), pp. 301–302. 109 See González-Meneses and Álvarez (2013), p. 302. 107

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– If they are foreign, then within 6 months of the pre-merger certificate being issued, they must each send both the certificate itself and the draft terms of merger approved in the general meeting to the business registrar corresponding to the registered office of the company resulting from the merger. The business registrar of the resulting company will then determine if the documents comply with the law (art. 65.1 LME). – If they are Spanish, then the business registrar corresponding to the registered office of each of the merging companies will send the business registrar of the resulting company a document properly certifying that there is “no obstacle to the merger”. After examining these documents and the draft merger terms the business registrar will then determine if the documents comply with the law (art. 65.1 LME). This procedure ensures that analogous criteria are used in the scrutiny of legality of all the companies involved in the merger. The company resulting from the merger will perform the scrutiny of legality of the merger procedure regarding the aspects affecting the creation of a new company or amendments to the acquiring company—verifying, in the second case, that the merger has been approved (art. 65.1 LME).110 In the cases in which there must be employee participation111—regulated in Spain in Law 31/2006, which transposes 2001/86/EC—the business registrar, prior to including the company on the Business Register, must check (art. 65.2 LME): – That (1) an agreement on employee participation has been included or (2) the negotiation period has expired without reaching an agreement112; (3) or the competent organs in the merging companies have opted to be subject to the supplementary provisions on employee participation established in Law 31/2006.113 – That the statutes of the company resulting from the merger do not contradict the provisions on employee participation that have been established.114

10.5

Registration and Publication of the Intra-Community Cross-Border Merger

Article 66.1 LME states that the regulations on publication established for the common merger (art. 43 LME) will be applicable to companies subject to Spanish legislation.115 110

See Fernández-del-Pozo (2009), p. 957. See Davies and Worthington (2012), p. 1120. 112 See Esteban-Velasco (2009), pp. 1014–1018 and 1018–1024. 113 See Esteban-Velasco (2009), pp. 1024–1032; Siems (2004), pp. 177–178. 114 See González-Meneses and Álvarez (2013), p. 302. 115 See Cabanas (2015), p. 948; Fernández-del-Pozo (2009), p. 964. 111

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In the specific case of the publication regime relating to intra-Community crossborder merger, article 66.2 LME establishes that an indication on the exercise of creditors’ and members’ rights must be published in the Official Gazette of the Business Register for the benefit of the members and creditors of each of the merging companies—even when they are not subject to Spanish law—along with an address from which they may obtain free of charge exhaustive information on the exercise of these rights.116 Article 66.3 LME establishes that there must be coordination between the registers of the merging companies and the resulting company.117 Once the merger process has been completed, the register in which the resulting company is registered must immediately notify the registries in which the merging companies are registered, so that the companies can be removed from the register.118 The effectiveness of the intra-Community cross-border merger is governed by the same rules as the common merger119: the merger will be effective once the new company or the acquisition has been registered in the corresponding Business Register (art. 46 LME).

10.6

Nullity of the Intra-Community Cross-Border Merger

Article 17 Directive 2005/56/EC regulates the validity of the intra-Community cross-border merger and establishes that a “cross-border merger which has taken effect as provided for in Article 12 may not be declared null and void”. Directive 2005/56/EC influenced the common merger regime in the LME, modifying aspects of existing Spanish company law on this area, and incorporating the provisions set out for the intra-Community cross-border merger.120 Consequently, we must refer to article 47 LME for regulation relating to challenging an intra-Community cross-border merger via a declaration of nullity. The article established that no merger may be challenged after it has been registered in the registry provided that it has been performed in accordance with the regulation of the LME. However, if, for the reason given above, the merger cannot be challenged, members and third parties who have been adversely affected by it may claim damages (art. 47.1 LME). There is a 3 months’ time period for challenging the merger, starting on the first day in which the challenger is in a position to oppose it (art. 47.2 LME).

116

See Fernández-del-Pozo (2009), p. 964; González-Meneses and Álvarez (2013), p. 302. Art. 13.2 Directiva 2005/56/EC. 118 See González-Meneses and Álvarez (2013), p. 303. 119 Arts. 12 and 14 Directiva 2005/56/EC. 120 See Mambrilla (2009), p. 916. 117

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Redress Mechanisms

Article 62 LME establishes that the members of Spanish companies participating in an intra-Community cross-border merger who vote against a merger agreement in which the resultant company has its registered office in another Member State may separate from the company in accordance with Title IX of the LSC.121 It is important to highlight that this separation right is restricted to those who vote against the merger agreement. This differs from other legal scenarios related to separation rights122 in which this right is granted to all those who do not vote in favour, that is, also those who abstain or who do not attend the meeting.123 Article 4.2 Directive 2005/56/EC authorizes Member States to incorporate measures designed to protect the rights of creditors of merging companies. In this area, the Spanish legislator has chosen to make a generic reference to the common merger regime (art. 44 LME). In the Spanish system, the opposition of creditors is established as a preliminary protection mechanism. Thus, the merger deed cannot be granted until a month has passed since the publication of the draft terms of merger, so that creditors may exercise their right to opposition.124

12

Conclusions

The regime for intra-Community cross-border mergers contained in the LME is a fragmented one. One part of this regime, the part relating to specific aspects of the intra-Community cross-border merger is contained in Chapter II of Title II of the LME (arts. 54–67 LME). The rest of the regime is that of the common merger, contained in the LME and in its supplementary regulations.125 Fundamental in this regard is article 55 LME, which establishes that the articles of LME governing mergers in general are supplementarily applicable to all aspects of cross-border mergers not treated in articles 54–67 of the said law. The transposition to Spanish law of Directive 2005/56/EC has significantly influenced the regime for common mergers or non-cross-border mergers. Some of the regulations laid down in Directive 2005/56/EC for intra-Community crossborder mergers have been incorporated into the common merger regime by the Spanish legislator. For this reason, the supplementary application of the common

Article 62 LME has been modified twice to date. In the first version, in 2009, the right to separation had an even more exceptional character than it has in the current version and referred to the regulations in the regime for the sociedad de responsabilidad limitada, contained in the LSC. There have been several changes to the regulation of separation rights in both the LSC and the LME. 122 As occurs with company transformation (art. 15 LME). 123 See Cabanas (2015), p. 473; González-Meneses and Álvarez (2013), p. 301. 124 See Cabanas (2015), p. 480. 125 See in this chapter, Sect. 1, where we refer to the most important ones. 121

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merger regime to the intra-Community cross-border merger even occurs to provide answers to questions, the original regulation of which is contained in Directive 2005/ 56/EC.126 The concept of intra-Community cross-border merger has a double dimension. In a broad sense, it includes both the content of Directive 2005/56/EC and the creation of a SE.127 In a strict sense, it refers only to the concept contained in the text of Directive 2005/56/EC, which is largely based on aspects related to the subjects that may participate in the operation.128 The obligation to modify the draft terms of merger when there have been important changes in the valuation of the company’s assets or liabilities, is a specific aspect of Spanish merger law that affects intra-Community cross-border mergers in which one or more of the merging companies or the resulting company are subject to Spanish law.129 Before the transposition of Directive 2005/56/EC, the practice of company law in Spain had given rise to operations that were similar to the intra-Community crossborder merger in juridical and economic terms.130 For this reason, the incorporation of the content of this regulation into Spanish law clearly covers a gap in legislation. The regime of the SE has paved the way to the intra-Community cross-border merger, by addressing aspects in which there were differences in the juridical cultures of the Member States, like the monist and dual systems of company management and employee involvement.131 However, an important task that remains is the harmonization of registral law in the European Union. This aim was not reached during the long period during which the SE was being regulated nor during the regulation of the intra-Community cross-border merger. For this reason, intra-Community cross-border merger procedure includes many aspects in which the coordination between Member States is difficult.132

References Birkmose HS (2005) A market for company incorporations in the European Union? Tulane J Int Comp Law 13:55–108 Blanquet F (2001) Enfin la société européenne “la SE”. Revue du Droit de l'Union Européenne 1:65–109

126

For example, the entry into effect of the cross-border merger, regulated in article 12 Directive 2005/56/EC. 127 See in this chapter, Sect. 4. 128 See in this chapter, Sect. 4. 129 See in this chapter, Sect. 8.1. 130 See in this chapter, Sect. 3. 131 See in this chapter, Sects. 1 and 4. 132 See in this chapter, Sect. 10.

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Cabanas R (2015) Las fusiones y escisiones transfronterizas. In: Rojo Á et al (eds) Las modificaciones estructurales de las sociedades mercantiles. Thomson-Reuters-Aranzadi, Cizur Menor, pp 403–494 Davies PL, Worthington S (2012) Gower and Davies’ principles of modern company law. Sweet & Maxwell, London Díez-Picazo L (1993) Fundamentos de Derecho Civil Patrimonial, vol I (Introducción. Teoría del contrato). Civitas, Madrid Edwards V (2003) The European company – essential tool or eviscerated dream? Common Mark Law Rev 40:443–450 Enriques L (2013) A new EU business combination form to facilitate cross-border M&A: the compulsory share exchange. Univ Pa J Int Law 35:541–556 Esteban-Velasco G (2009) Derechos de participación de los trabajadores en las fusiones transfronterizas intracomunitarias. In: Rodríguez-Artigas F et al (eds) Modificaciones estructurales de las sociedades mercantiles, vol I, Transformación, fusión, fusiones transfronterizas intracomunitarias. Thomson-Reuters-Aranzadi, Cizur Menor, pp 975–1037 European Central Bank (2008) ECB monthly bulletin, October. https://www.ecb.europa.eu/pub/ pdf/mobu/mb200810en.pdf. Accessed 11 Mar 2019 Fernández-del-Pozo L (2009) La ejecución de la fusión transfronteriza. In: Rodríguez-Artigas F et al (eds) Modificaciones estructurales de las sociedades mercantiles, vol I, Transformación, fusión, fusiones transfronterizas intracomunitarias. Thomson-Reuters-Aranzadi, Cizur Menor, pp 927–974 Fouassier C (2001) Le statut de la “Société européenne”: un nouvel instrument juridique au service des entreprises. Revue du Marché commun et de l'Union européenne 445:85–88 García-Villaverde R (1996) Proyecto de fusión no aprobado por la Junta General de una de las sociedades que lo suscribieron. Revista de Derecho de Sociedades 6:199 et seq Girón J (1952) Derecho de sociedades anónimas (según la Ley 17 de julio de 1951). Universidad de Valladolid, Publicaciones de los Seminarios de la Facultad de Derecho, Valladolid Girón J (1976) Derecho de sociedades, vol I. Marcial Pons, Madrid González-Meneses M, Álvarez S (2013) Modificaciones estructurales de las sociedades mercantiles. Dykinson, Madrid Hommelhoff P (2001) Einige Bemerkungen zur Organisationsverfassung der. Europäischen Aktiengesellschaft. Die Aktiengesellschaft 46:279–287 Mambrilla V (2009) Particularidades de las fases preparatoria y decisoria. In: Rodríguez-Artigas F et al (eds) Modificaciones estructurales de las sociedades mercantiles, vol I, Transformación, fusión, fusiones transfronterizas intracomunitarias. Thomson-Reuters-Aranzadi, Cizur Menor, pp 851–925 Martí V (2006) Armonización en materia de concentraciones intraeuropeas: la décima directiva sobre fusiones transfronterizas de las sociedades de capital. Revista de Derecho de Sociedades 27:299–317 Martínez-Echevarría A (2005) La sociedad anónima europea: un régimen fragmentario con intención armonizadora. In: Beneyto JM, Martínez-Echevarría A (eds) El espacio financiero único de la Unión Europea: los mercados de valores. Marcial Pons, Madrid, pp 135–241 Martínez-Echevarría A (2006) El aumento del capital de la sociedad cotizada. Thomson-Civitas, Madrid Martínez-Echevarría A (2017a) Sistema monista (artículo 477 LSC). In: Prendes P, MartínezEchevarría A, Cabanas R (eds) Tratado de Sociedades de Capital. Comentario jurisprudencial, notarial, registral y doctrinal de la Ley de Sociedades de Capital. Thomson-Reuters-Aranzadi, Cizur Menor, pp 779–794 Martínez-Echevarría A (2017b) Órganos del sistema dual (artículo 478 LSC). In: Prendes P, Martínez-Echevarría A, Cabanas R (eds) Tratado de Sociedades de Capital. Comentario jurisprudencial, notarial, registral y doctrinal de la Ley de Sociedades de Capital. ThomsonReuters-Aranzadi, Cizur Menor, pp 794–805

The Mutual Influence Between Cross-Border Merger and Common Merger. . .

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Mercadal F (2015) El proyecto de las modificaciones estructurales. In: Rojo Á et al (eds) Las modificaciones estructurales de las sociedades mercantiles. Thomson-Reuters-Aranzadi, Cizur Menor, pp 55–134 Motos M (1953) Fusión de sociedades mercantiles. Editorial Revista de Derecho Privado, Madrid Papadopoulos T (2011) EU regulatory approaches to cross-border mergers: exercising the right of establishment. Eur Law Rev 1:71–97 Papadopoulos T (2012) The magnitude of EU fundamental freedoms: application of the freedom of establishment to the Cross-Border Mergers Directive. Eur Bus Law Rev 23:517–546 Pérez-Milla JJ (1996) Fusión internacional de sociedades anónimas en el espacio jurídico europeo. Aranzadi, Pamplona Sancho D (2001) La transferencia internacional de la sede social en el espacio europeo. Eurolex, Madrid Sequeira A (1999) El proyecto de fusión como condicionante del ámbito de los acuerdos a adoptar por las sociedades participantes en una fusión. Revista de Derecho de Sociedades 12:195–208 Sequeira A (2006) Consideraciones sobre la fusión internacional de sociedades anónimas. In: Rodríguez-Artigas F (ed) Derecho de sociedades anónimas cotizadas (Estructura de gobierno y mercados), vol II. Thomson-Reuters-Aranzadi, Madrid, pp 1511–1576 Siems MM (2004) The European Directive on cross-border mergers: an international model? Columbia J Eur Law 11:167–185 Siems MM (2007) SEVIC: beyond cross-border mergers. Eur Bus Organ Law Rev (EBOR) 8:307–316 Tapia AJ (2007) Fusiones y OPAS transfronterizas. Thomson-Aranzadi, Cizur Menor Tapia AJ (2009) Introducción. Delimitación del supuesto. Clases y régimen jurídico aplicable. Fusiones extracomunitarias. In: Rodríguez-Artigas F et al (eds) Modificaciones estructurales de las sociedades mercantiles, vol I, Transformación, fusión, fusiones transfronterizas intracomunitarias. Thomson-Reuters-Aranzadi, Cizur Menor, pp 807–850 Trias M (2001) La fusión y operaciones de similar alcance. In: Fernández-del-Pozo L et al (eds) Las operaciones societarias de modificación estructural: análisis de su tratamiento jurídico tributario y contable. Tirant lo Blanch, Valencia, pp 71–92 Vicent-Chuliá F (2008) Reforma del régimen de la fusión y otras modificaciones estructurales (Ante la Directiva 2005/56/CE, sobre fusión transfronteriza y el Anteproyecto de Ley de modificaciones estructurales de las sociedades mercantiles, de 14 de junio de 2007). Revista de Derecho Patrimonial 20:25–76

Alfonso Martínez-Echevarría is Professor of Commercial Law at the University CEU San Pablo, Madrid, Spain. Doctor in Law and Law degree from University Complutense of Madrid. Arbitrator accredited by the Chartered Institute of Arbitrators (CIArb), London, UK. Director of the Centre of Financial Markets Law of the University CEU San Pablo. Partner of Martínez-Echevarría Lawyers. Corresponding Member of the Royal Academy of Jurisprudence and Legislation (Spain). He has participated in eleven research projects, in seven of them as director. He has been visiting professor at the University of Aarhus, Bologna, Bonn, Columbia, Harvard, Heidelberg, Lomonosov Moscow State University, Oslo, Oxford, University College London and Max-Planck Institut in Hamburg, among others.

Cross-Border Mergers Directive and Its Impact in the UK Jonathan Mukwiri

1 Introduction This paper assesses the impact of cross-border merger rules in the UK with a particular review of cross-border merger cases decided by the UK court between 2007 and 2017. The Cross-border Mergers Directive—Tenth Company Law Directive 2005/56/EC, on cross-border mergers of limited liability companies (“CBM Directive”)—was adopted on 26 October 2005 and came into force on 15 December 2005 to be implemented by Member States by 15 December 2007. The legal basis of CBM Directive was Article 44 of the Treaty Establishing the European Community, which aims to abolish obstacles to freedom of establishment. In order to facilitate cross-border mergers, making it easier for companies within the EU to merge, the CBM Directive requires that national law should not “introduce restrictions on freedom of establishment or on the free movement of capital save where these can be justified in accordance with the case-law of the Court of Justice” (Recital 3). In a study conducted by Bech-Bruun and Lexidale (firms), on the implementation of the CBM Directive across the EU and EEA, a study commissioned by the EU’s Directorate General on Internal Markets and Services, the study found that there is strong and substantial evidence that the CBM Directive has brought about a new age of cross-border mergers activity.1 The CBM Directive provides an effective legal framework for removing obstacles to freedom of establishment so that companies can restructure within the EU. The need for this had already been recognised by the Court of Justice of the European Union (“CJEU”) in earlier cases.

European Commission, “Study on the Application of the Cross-Border Mergers Directive” (September 2013).

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J. Mukwiri (*) Durham Law School, Durham University, Durham, UK e-mail: [email protected] © Springer Nature Switzerland AG 2019 T. Papadopoulos (ed.), Cross-Border Mergers, Studies in European Economic Law and Regulation 17, https://doi.org/10.1007/978-3-030-22753-1_23

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In Sevic Systems AG, the Landgericht Koblenz in Germany had referred for preliminary ruling to the CJEU asking essentially whether it was contrary to freedom of establishment to refuse registration of a proposed merger between a company established in another Member State and a German company into the German register of companies on grounds that the Umwandlungsgesetz (German law on company formation) provides only for registration of mergers between companies established in Germany. On 13 December 2005, the European Court of Justice (“ECJ”) gave an affirmative ruling, stating that cross-border merger operations constitute particular methods of exercise of the freedom of establishment, important for the proper functioning of the internal market, and are therefore amongst those economic activities in respect of which Member States are required to comply with the freedom of establishment laid down by Article 43 EC.2 The CBM Directive has since superseded the outcome of the Sevic decision.3 Given that the CBM Directive was already adopted, arguably Sevic was decided in the spirit of the CBM Directive albeit without any reference to the CBM Directive. The CBM Directive, which came into force only 2 days after the ruling in Sevic, provides the legal framework for effecting cross-border mergers as particular methods of exercise of the freedom of establishment. It also puts an end to the use of national law to restrict cross-border mergers. In Centros Ltd, the Erhvervs- og Selskabsstyrelsen (the Danish Companies Board) had refused to register a branch of Centros in Denmark on grounds that Centros was not seeking to establish a branch but a principal establishment by evading to pay the minimum capital for establishing a company under Danish law. Mr and Mrs Bryde (Danish domicile in Denmark) had incorporated Centros Ltd in the UK where there is no minimum capital requirement, the company had never traded in the UK, and Mrs Bryde sought to register a branch of Centros in Denmark. The CJEU, affirming the right of companies to exercise their freedom of establishment, said that the fact that a national of a Member State who wishes to set up branches in other Member States chooses to form it in the Member State whose rule of company law seem to him the least restrictive and to set up branches in other Member States cannot, in itself, constitute an abuse of the right of establishment.4 As nothing in the CBM Directive requires merging companies to be of any size or substance, the CBM Directive facilitates the setting up of companies in the UK where there is no required minimum capital and opening branches in Member States with less favourable company laws, or using shelf companies in the UK to move businesses from restrictive EU jurisdictions into the UK. It is also the case that the CBM Directive can also be used for re-incorporations.5 The main arguments in this paper are twofold. First, the Cross-border Mergers Directive provides a forum shopping opportunity for non-UK companies to use the

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Case C-411/03 Sevic Systems AG [2005] ECR I-10805 [para 19]. Siems (2007), p. 309. 4 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-01459 (para 39). 5 Gerner-Beuerle et al. (2017). 3

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UK court to restructure their companies using the continental method of restructuring companies. The takeover is the familiar method of restructuring companies in the UK. For non-UK companies that wish to restructure through their familiar method of mergers and wish to use a favourable jurisdiction for restructuring their companies, the Directive provides an answer. Second, despite the facilitation of the Directive, cross-border mergers are unlikely to displace the English schemes of arrangement and the takeover method of restructuring companies in the UK. Thus, the impact of the Directive lies in its attractiveness to non-UK companies. The CBM Directive was implemented in the United Kingdom by the Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974) (“Regulations”). The Regulations sets out rules to facilitate cross-border mergers of limited liability companies. The Regulations only apply if the companies involved are incorporated in more than one member state. To a large extent, the Regulations replicate the wording of the CBM Directive. Where the Regulations wording appear to suggest a restriction to cross-border mergers, UK courts have applied a purposive interpretation to align these with the CBM Directive, which aims to abolish obstacles to freedom of establishment. Analysis of merger cases between 2007 and 2017 reveal a constructive facilitation of cross-border mergers in the UK. In approving crossborder mergers, UK courts take the approach of examining the proposed merger with a view to being satisfied that it did not adversely affect stakeholders (whether shareholder, employee or creditor) in any material way and that there was no other good reason why approval of the proposed merger should be refused. Despite the facilitation of cross-border mergers, this paper finds that takeovers are still more popular than cross-border mergers. It argues that pre-Brexit impact of cross-border mergers in the UK is unlikely to change post-Brexit. The paper proceeds in the following way. The second section starts with a brief comparison of the Third and Tenth Company Law Directives, and then examines the types of companies, mergers and process of cross-border mergers under the Regulations and the CBM Directive. The third assesses the extent at which the Regulations and interpretation thereof facilitate cross-border mergers. The fourth compares schemes of arrangement in English law with cross-border mergers. The fifth compares takeovers with cross-border mergers in restructuring of companies. The sixth argues that if or when the CBM Directive ceases to apply in the UK post-Brexit, the vacuum of cross-border mergers may lead to more takeovers and EEA companies using schemes of arrangement. The seventh makes concluding remarks.

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2 Type of Companies, Mergers and Process of CrossBorder Mergers 2.1

Comparison of Third and Tenth Directives

The Tenth Company Law Directive (CBM Directive) is not the first EU measure that has sought to facilitate mergers of companies. The EU first sought to facilitate EU mergers through the Third Company Law Directive.6 At EU level, given that the Third Directive regulated domestic mergers, cross-border mergers remained unregulated until 2005 when the Tenth Directive was enacted. Before 2005, some Member States were reluctant to accept cross-border mergers. For example, Germany was afraid of a possible circumvention of their company and employment law safeguards, while the UK preferred other methods of corporate restructuring like takeover bids.7 One of the thorny aspects of EU cross-border mergers that delayed the adoption of an EU cross-border directive was the controversial provision for employee participation. For some countries it was not acceptable that employee participation would become compulsory, whereas others feared that this participation would be circumvented by means of cross-border mergers.8 But herein we focus on UK issues. At national level, the Third Directive was implemented in the UK by the Companies (Mergers and Divisions) Regulations 1987,9 which came into force 1 January 1988. The implementation of the Third Directive was subsequently consolidated into Part 27 of the Companies Act 2006. As already stated, the CBM Directive was implemented by the Regulations 2007. Both the Tenth and Third Directive facilitate the continental-type of mergers. The language used in the Third Directive (consolidated in Part 27) and that used in the Tenth Directive (as implemented by Regulations 2007) is very similar. But this comparison does not match the impact these provisions have had in the UK. Thirty years on since 1 January 1988 when the Third Directive was implemented in the UK, there is no evidence that Third Directive (and Part 27) type mergers have ever been used in the UK. In Re Itau BBA International Ltd, commenting on the impact of the Third Directive (and Part 27), Henderson J said that “the provisions appear in practice to have been a complete dead letter since they first came into force on 1 January 1988.”10 Will the Tenth Directive (and Regulations 2007) have an impact in UK where the Third Directive (and Part 27) has failed? The scope of the Third Directive contributed to its failure in the UK. The Third Directive provisions in Part 27 apply to mergers involving a public company and do 6 Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies. 7 Papadopoulos (2008). 8 Siems (2004), p. 172. 9 Statutory Instrument 1987/1991. 10 [2012] EWHC 1783 (Ch); [2013] Bus LR 490, 500.

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not apply where the proposed merging company is being wound up.11 The Third Directive type of merger involves either one or more public companies being absorbed into another existing public company, or two or more public companies merging to form a new company.12 By excluding mergers involving only private companies and any company being wound up, the Third Directive was bound to fail if UK solvent public companies did not find its provisions attractive. With the takeover being the popular method of restructuring solvent companies in the UK, the Third Directive was not an attractive option for UK companies. Unlike the Third Directive, there is a glimmer of hope for the Tenth Directive, for the latter avoids focusing on public companies and widens the scope to both public and private companies. The Third Directive was bound to fail in the UK because it sought to introduce into the UK an unfamiliar method of restructuring public companies. The Third Directive was not seen as a very important legal innovation in the UK, which perhaps explains the lack of UK literature on this Directive.13 The takeover is the familiar method of restructuring public companies in the UK. The takeover focuses on transactions in shares, avoiding the cost of transferring properties and liabilities of the merging companies. The cost implications apart, “British practitioners have become so familiar with the takeover that alternative means of amalgamation are not seriously explored.”14 Unlike the Third Directive with its focus on facilitating domestic mergers, the Tenth Directive focuses on facilitating cross-border mergers. Whilst the method of restructuring companies for both the Third and Tenth Directive remain unfamiliar in the UK, the success of the Tenth Directive lies in its provisions being attractive to non-UK companies that wish to use a UK court to restructure their companies. The Tenth Directive provides positive forum shopping, and there is evidence that UK courts are steadily giving effect to its provisions.

2.2

Types of Companies

The CBM Directive apply to mergers of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community, provided at least two of them are governed by the laws of different Member States.15 Under the CBM Directive, “limited liability companies” excludes companies limited by

11

Companies Act 2006, Part 27, s 902. Companies Act 2006, Part 27, s 904. 13 A simply search for UK literature on the Third Directive (“Directive 78/855/EEC”) in one popular UK company law journal (the Company Lawyer) found no discussion on this Directive (29 August 2017). 14 Davies and Worthington (2012), p. 114. 15 Article 1, the CBM Directive 2005/56/EC. 12

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guarantee without shares.16 In the UK, the Regulations apply to mergers involving a UK company. The Regulations apply to registered,17 and unregistered,18 public and private companies limited by shares. Under the Regulations, “UK Company” excludes companies limited by guarantee without share capital or companies being would up.19 In the UK, the type of a company limited by guarantee tends to be adopted by non-profit-making companies or charities. That the Regulations exclude these non-profit-making companies is in accord with freedom of establishment. The Treaty on the Functioning of European Union (“TFEU”), Article 54 (Ex Article 48 EC), excludes “non-profit-making” companies from the right of freedom of establishment.

2.3

Types of Mergers

As to the types of mergers, the Regulations replicate the wording of the CBM Directive, and provide for three types of cross-border mergers: (1) a merger by absorption; (2) a merger by absorption of a wholly-owned subsidiary; or (3) a merger by formation of a new company. First, a merger by absorption is where an existing transferee company absorbs one or more transferor companies (Regulation 2(2); CBM Directive Article 2(2)(a)). It is a requirement that at least one of those companies is a UK company, and at least one of those companies is an EEA company (Regulation 2(2)). Non-UK companies wishing to use the UK forum may simply use a UK shelf company for an “existing” transferee company. The cases discussed below show this type of merger to be the most favoured by non-UK companies. Second, a merger by absorption of a wholly-owned subsidiary is where a transferee parent company absorbs its wholly-owned subsidiary transferor company (Regulation 2(3); CBM Directive Article 2(2)(c)). It is a requirement that either the transferor company or the transferee company is a UK company, and either the transferor company or the transferee company is an EEA company (Regulation 2 (3)). The use of a UK shelf company may not help non-UK companies wishing to use the UK forum under this type of merger. Third, a merger by formation of a new company is where two or more transferor companies, at least two of which are each governed by the law of a different EEA State, merge to form a new transferee company (Regulation 2(4); CBM Directive Article 2(1)(b) of the CBM Directive defines “limited liability companies” as companies with “share capital”—which suggests excluding companies limited by guarantee without share capital. 17 Companies Act 2006, s 1; Companies (Cross-Border Mergers) Regulations 2007, reg 3(1). 18 Companies Act 2006, s 1043; Companies (Cross-Border Mergers) Regulations 2007, reg 5. 19 Companies (Cross-Border Mergers) Regulations 2007, reg 3(1) defines a “UK company” as a company within the meaning of the Companies Acts (see Companies Act 2006, s 1) other than— (a) a company limited by guarantee without a share capital (see Companies Act 2006, s 5) or a company being wound up. 16

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Article 2(2)(b)). It is a requirement that at least one of the transferor companies or the transferee company is a UK company (Regulation 2(4)). This could be achieved in the UK with ease, if it favours a non-UK company to use the UK forum. An intending transferor non-UK company (EEA-A) may start by simply acquiring two UK shelf companies, transferor Shelf-B and transferee Shelf-C companies. EEA-A may give under some contractual arrangement some nominal asset on acquisition. EEA-A and Shelf-B would then transfer all their assets and liabilities to Shelf-C to form a new company. This type of merger will be attractive to non-UK companies wishing to transfer their business into the UK for whatever reasons.

2.4

Process of Cross-Border Mergers

In the UK, the designated competent authority for supervising the process of crossborder mergers is the High Court. There are two main stages in the process: a pre-merger stage, and approval of the merger stage. The first stage is for a UK merging company to apply to the court for an issue of pre-merger certificate, after the company has completed properly the pre-merger acts and formalities for the crossborder merger.20 The court must be satisfied that the pre-merger requirements have been complied with before issuing the pre-merger certificate. The second stage is for all the merging companies to make a joint application to the competent authority in the jurisdiction of the transferee to approve the merger. Where the transferee is a UK company, the High Court may, on the joint application of all the merging companies, make an order approving the completion of the cross-border merger.21 First, we note the pre-merger stage. The directors of the UK merging company must draw up and adopt a draft of the proposed terms of the cross-border merger.22 The directors of the UK merging company must draw up and adopt a report, explaining the effect of the cross-border merger for members, creditors and employees of the company.23 An independent expert’s report must be drawn up— unless the cross-border merger is either a merger by absorption of a wholly-owned subsidiary, or a merger by absorption where at least 90% of the shares of the transferor are held by the transferee, or every member of every merging company agrees that such a report is not required.24 Shareholders and employees 20

Companies (Cross-Border Mergers) Regulations 2007, reg 6; Re House-Clean Ltd [2013] EWHC 2337 (Ch); [2013] BCC 611. 21 Companies (Cross-Border Mergers) Regulations 2007, reg 16; Re International Game Technology plc [2015] EWHC 717; [2015] BCC 866. 22 Companies (Cross-Border Mergers) Regulations 2007, reg 7; Re House-Clean Ltd [2013] EWHC 2337 (Ch); [2013] BCC 611; Re ITouch Ltd [2016] EWHC 3448 (Ch); [2017] BCC 96. 23 Companies (Cross-Border Mergers) Regulations 2007, reg 8; Re House-Clean Ltd [2013] EWHC 2337 (Ch); [2013] BCC 611. 24 Companies (Cross-Border Mergers) Regulations 2007, reg 9; Re International Game Technology plc [2015] EWHC 717; [2015] BCC 866.

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(or employees’ representatives) of the UK merging company must be able to inspect the relevant documents (draft terms of the merger, directors’ report and independent expert’s report).25 The directors of the UK merging company must deliver to the registrar of companies the draft terms of the merger for the registrar publicise to proposed merger in the Gazette.26 The draft terms of the merger must be approved by at least 75% of each class of shareholders of the UK merging company at a meeting summoned by the court—this approval is not required in a merger by absorption of a wholly-owned subsidiary.27 There is no requirement for creditors to approve the merger, but the court may require such approval to protect their interests. If so required, the draft terms of the merger must be approved by at least 75% of each class of creditors of the UK merging company at a meeting summoned by the court.28 Every notice summoning a meeting that is sent to a member or creditor must include copies of the relevant documents (draft terms of the merger, directors’ report and independent expert’s report).29 Second, we note the approval stage. Where the transferee is a UK company, the court, on the joint application of all the merging companies, make an order approving the completion of the cross-border merger. The court must be satisfied that a pre-merger certificate had been obtained, the pre-merger certificate is not more than 6 months old, the draft terms of merger in every pre-merger certificate are the same, and the arrangements of employee participation in the transferee company have been complied with (where appropriate). If the court approves the merger, it must also fix a date on which the consequences of the cross-border merger are to have effect, a date not less than 21 days after the date of the approval. In Re Sigma Tau Pharmaceutical Ltd,30 the court said that the approach taken when approving cross-border mergers is to examine the proposed merger with a view to being satisfied that it did not adversely affect any stakeholder in any of the merging companies (whether shareholder, employee or creditor) in any material way and that there was no other good reason why approval of the proposed merger should be refused. Whilst the cross-border merger process appears to be straightforward, the complications of dealing with the transfer of the assets and liabilities of the transferor companies may not be attractive in the UK to displace the takeover method that deals with only share transfers.

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Companies (Cross-Border Mergers) Regulations 2007, reg 10; Re House-Clean Ltd [2013] EWHC 2337 (Ch); [2013] BCC 611. 26 Companies (Cross-Border Mergers) Regulations 2007, reg 12; Re House-Clean Ltd [2013] EWHC 2337 (Ch); [2013] BCC 611. 27 Companies (Cross-Border Mergers) Regulations 2007, reg 13; Re Oceanrose Investment Ltd [2008] EWHC 3475 (Ch); [2009] Bus LR 947; Re Olympus UK Ltd [2014] EWHC 1350 (Ch); [2004] 2 BCLC 402. 28 Companies (Cross-Border Mergers) Regulations 2007, reg 14. 29 Companies (Cross-Border Mergers) Regulations 2007, reg 15. 30 [2013] EWHC 3279 (Ch); [2014] BCC 70.

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Employee Participation

The provisions on the participation of employees in a company were the key problem for the enactment of the CBM Directive.31 These provisions have been replicated in the Regulations to protect the rights of employees to participate in the management of companies where those rights existed in the merging companies prior to the merger. In the UK, there is no statutory requirement for employees to participate in the management of companies at board level. As such, employee participation regime is generally inapplicable to a UK merging company. The starting point in a proposed merger is to ascertain whether employee participation is applicable. In approving a cross-border merger, the court must be satisfied, “where appropriate, any arrangements for employee participation in the transferee company have been determined in accordance with Part 4 of these Regulations (employee participation).”32 The phrase “where appropriate,” suggests that in some cases this would be inapplicable. But nothing in Part 4 of the Regulations imposes employee participation upon UK companies. In effect, the Regulations provide for employee participation regime to cater for a cross-border merger involving merging companies from jurisdictions where there is mandatory employee participation. Thus, employee participation apply where the transferee company is a UK company and (a) a merging company has, in the 6 months before the publication of the draft terms of merger, an average number of employees that exceeds 500 and has a system of employee participation, or (b) a merging company has employee representatives amongst members of the administrative or supervisory organ or their committees or of the management group which covers the profit units of the company.33 Employee participation will be inapplicable to small companies with few employees. The company resulting from a cross-border merger is essentially a domestic company and would be governed by national law to the employee participation regime.34 As such, where the resulting company is a UK company, as the UK has no mandatory employee involvement at board level, crossborder mergers would not create unintended employee management rights. For large UK companies with more than 500 employees, cross-border mergers will be unattractive due to complexity of negotiating employee participation agreement prior to approval of a proposed merger. To such large UK companies the takeover will remain the attractive method of restructuring. A review of the cross-border merger cases between 2007 and 2017 revealed no company that have applied the provisions for employee participation. The cases that referred to employee participation provisions only did so to dismiss their application. In the following cases, the application of these provisions was dismissed by a simple short statement. In Re Oceanrose Investment Ltd, Richards J found that “the 31

Pannier (2005), p. 1425. Companies (Cross-Border Mergers) Regulations 2007, reg 16(1)(f). 33 Companies (Cross-Border Mergers) Regulations 2007, reg 22. 34 Ugliano (2007), p. 609. 32

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Directive and the Regulations also make provision for employee participation, but they do not arise for consideration in the present case.”35 In Namura International plc, Birss J was satisfied that “that provision does not apply to this merger because essentially there is no works council in either of the two relevant companies.”36 In Re Sigma Tau Pharmaceutical Ltd, Rose J ruled in that case that the “Regulations do not therefore apply to the merger.”37 In Re Olympus UK Ltd and Others, having acknowledged the provisions, Hildyard J ruled that “it is not necessary to consider these here.”38 In Re Lanber Properties LLP, considering the criterion in Regulation 16, Barling J found that “neither the LLP nor either of the two German companies has any employees and, therefore, that criterion is not applicable.”39 In International Game Technology plc, Birss J was satisfied that “there is no relevant employee participation” and the provision did not apply.40 Arguably, cross-border mergers are attractive to companies with no or few employees, for which employee participation provisions are inapplicable.

3 Regulations and Facilitation of Cross-Border Merges The Regulations and their interpretation are giving positive effect to cross-border mergers. The Regulations seeks to facilitate cross-border or continental-type mergers, which are similar to mergers by fusion. These types of mergers are uncommon in the UK. In 2005, Jonathan Rickford observed that the great reluctance of UK practitioners to use the merger by fusion route may be explicable by the fact that it is still unfamiliar and it is not in practice needed because the acceptable substitutes are readily available and familiar.41 In 2013, Stephen Horan observed that continental-type mergers are not a familiar concept in the UK.42 It is here argued that the Regulations are effective in facilitating continental-type mergers (or mergers by fusion) by allowing UK companies to merge with continental companies that are familiar with mergers by fusion. Since the Regulations came into force on 15 December 2007, the few reported court cases concerning cross-border mergers shows a growing use of continental-type mergers in the UK.43 The Regulations provide a positive forum shopping for those familiar with continental-type mergers

35

[2009] Bus LR 947, 948. [2013] EWHC 2789 (Ch). 37 [2014] BCC 70. 38 [2014] Bus LR 816, 822. 39 [2014] EWHC 4713 (Ch). 40 [2015] Bus LR 844, 847. 41 Rickford (2005), p. 1399. 42 Horan et al. (2013), p. 349. 43 This is based on a search in the Westlaw database for the period between 15 Dec 2007 and 29 Aug 2017. 36

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to use the service of UK courts. The cases examined below shows that UK courts are giving positive effect to cross-border mergers. In Re Wood DIY Ltd,44 the court was required to determine whether to approve a cross-border merger by absorption (Regulation 2(2); CBM Directive Article 2(2)(a)) between an English transferee (Wood DIY Ltd), and an Italian transferor (Olivero Franco SARL). Re Wood DIY Ltd was the first cross-border merger case, as regards to the CBM Directive, to come before the High Court. Under Regulations 16, the court has the discretion, on the joint application of all the merging companies, to approve the cross-border merger for the purposes of Article 11 of the CBM Directive. As no statutory test existed for the exercise of this discretion, Roth J considered that it was appropriate to apply the test adopted for a scheme of arrangement, as expressed in the case of National Bank Ltd. In Re National Bank Ltd, a more familiar test for approving schemes of arrangement is where “the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.”45 Thus, in Re Wood DIY Ltd, starting with a more familiar test for approving a scheme of arrangement, the UK court moved to approve a less familiar continental-type merger. In Re Itau BBA International Ltd,46 the issue was about the meaning of the term “existing transferee company” in a merger by absorption (Regulation 2(2); CBM Directive Article 2(2)(a)). This was a merger between an English transferee company (Itau BBA International Ltd), a formerly shelf company acquired for the purpose of the merger, and a Portuguese transferor company (Banco Itaú BBA International SA). The problem was that “existing transferee company” is defined in Regulation 3 (1) as meaning “a transferee company other than one formed for the purposes of, or in connection with, a cross-border merger”. On a literal reading of Regulation 3(1), Itau BBA International Ltd (a formerly shelf company) formed for the purpose of the merger, would be disqualified from acting as the transferee. Having examined the purpose and wording of Directive 2005/56, Henderson J opined that “something had gone wrong with the language and drafting of reg. 3(1)” (para 30). Correcting Regulation 3(1) by way of purposive interpretation, Henderson J held that Itau BBBA International Ltd “was an ‘existing transferee company’ and the court had jurisdiction to entertain its application” (para 33). The effect of this case is to align the Regulations with the Directive in facilitating cross-border mergers by correcting the restrictive wording of the Regulations. This purposive interpretation of the restrictive wording of the Regulations also suggests that the UK is open for merger business. “Companies can now set up a newly incorporated company in the UK and use that as a means to transfer their entire business into the UK under the Directive.”47 A similar outcome was also reached in Re Cable & Wireless

44

[2011] EWHC 3089 (Ch); [2012] BCC 67. Re National Bank Ltd [1966] 1 WLR 819, 829. 46 [2012] EWHC 1783 (Ch); [2013] BCC 225. 47 Horan et al. (2013), p. 353. 45

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Communications Ltd,48 where Nugee J said that there was nothing in the language of the Regulations or the Directive that required reasons why a company had been brought into existence, nor any requirement that the company should have any particular size or substance. In Re Diamond Resort (Europe) Ltd,49 the issue was whether there would be a significant material detriment to the interests of shareholders, employees or creditors of the incoming companies to be merged (transferor companies located in a foreign jurisdiction) if the merger were approved. The merger by absorption (Regulation 2 (2); CBM Directive Article 2(2)(a)) involved an English transferee company (DREL) seeking to absorb 14 Spanish subsidiaries. DREL was a non-trading holding company for 14 Spanish subsidiary companies, and DREL was in turn a subsidiary of another English company (DRGH). On the facts, DREL had been insolvent on a balance sheet basis of 31 December 2011 and dependent on the support of DRGH under a letter of comfort to continue as a going concern. The Spanish competent authority, Commercial Registry, had granted pre-merger certification for the merger of the 14 Spanish companies (of which 13 were solvent) into DREL. The approval application before Sales J was essentially asking the UK court to peep behind the Spanish certification. In exercising discretion to approve the merger under Regulation 16, Sales J relied primarily on the witness statement of the director of DREL, a statement showing how the balance sheet and net assets position of DREL had been significantly improved as of 31 December 2012. Sales J, having been satisfied on the basis of that evidence, that there will not be a significant material detriment to the creditors of the merging Spanish companies nor to the shareholders, employees and creditors of DREL itself, approved the merger. Apart from facilitating cross-border mergers, the court played a constructive role of ensuring protection of stakeholders. In Re Honda Motor Europe Ltd,50 the issue concerned whether it would be an abuse of the court’s process for the court to make an order to convene meetings (Regulation 11) where it was unlikely to sanction the merger. An English transferee company (HE) sought to absorb the sales business of a Spanish transferor company (Montesa) where Montesa would retain its motorcycle manufacturing business and only transfer its sales business. A new subsidiary company (Newco) in Spain would be created into which the Montesa’s sales business would be demerged, before merging with HE, with cross-border merger becoming effective a scintilla of time after the completion of the de-merger in order for HE to avoid regulatory obligations should Newco ever become a trading company. As Spanish law would not allow such incorporation, HE proposed the use of an Italian corporate vehicle. The first stage of the merger was to ask the court to order the convening of shareholder meeting, and the second stage was to ask the court to sanction the merger. Given that the companies involved were yet in the planning stage, the scintilla of time of the de-merger and the merger was uncertain, the question was whether it was an abuse of

48

This case was heard in the Chancery Division on 30 November 2016 (unreported). [2012] EWHC 3576 (Ch); [2013] BCC 275. 50 [2013] EWHC 2842 (Ch); [2013] BCC 767. 49

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the court’s process. The matter came before Norris J, who granted the order sought, finding that the application was not deliberately abusive of the court’s process in the sense that HE was manipulating it to avoid something which the Regulations required. The Regulations required the court’s involvement, and it was acceptable for the court to be involved at this early stage even though it could not guarantee sanctioning the merger at a later stage. The case demonstrates the willingness of the UK court to make the facilitation of cross-border mergers a success, even getting involved in innovativeness of merging companies at such early stages of the merger process. In Re Sigma Tau Pharmaceutical Ltd,51 the court approved a cross-border merger by absorption (Regulation 2(2); CBM Directive Article 2(2)(a)) between an English transferee (Sigma-Tau Pharma Ltd), and a Portuguese transferor (Sigma-Tau Rare Diseases). Applying Re Diamond Resort (Europe) Ltd, the court said that the correct approach was to examine the proposed merger with a view to being satisfied that it did not adversely affect any stakeholder in any of the merging companies (whether shareholder, employee or creditor) in any material way and that there was no other good reason why approval of the proposed merger should be refused. The interests of shareholders were easily satisfied, for both companies were wholly-owned subsidiaries within the same corporate group, and so there could be no concern about the interests of the shareholders who were directing the merger. The interests of creditors were satisfied on grounds that both companies ware solvent. The interests of employees were satisfied on assurance that employees of the Portuguese company would carry on as usual except that they would be employed by the English company after the merger. Having been satisfied that the interests of stakeholders would be protected, Rose J approved the merger. In Re Olympus UK Ltd,52 the question was whether a merger by absorption could be approved where the transferor shareholders would receive no consideration. This was a test case that came before Hildyard J. In this test case, three applicant companies were all incorporated in England. The first and second applicants proposed a cross-border merger by absorption with a German company, and the third applicant proposed a merger by absorption with a German registered Societas Europaea. Having compared the wording of both Article 2(2) CBM Directive and Regulation 2(2) and (4), Hildyard J answered the question in the affirmative. Hildyard J held that the reference in the CBM Directive and the Regulations to members of the transferor company receiving consideration admitted of the possibility that consideration, though receivable, did not have to be received. It sufficed that shareholders were offered consideration, and a merger would be compliant with both CBM Directive and the Regulations if the shareholders had waived their right to receive the consideration. The case demonstrates the willingness of the UK court to facilitate cross-border mergers by interpreting the provisions of both CBM Directive and the Regulations in a constructive way.

51 52

[2013] EWHC 3279 (Ch); [2014] BCC 70. [2014] EWHC 1350 (Ch); [2014] Bus LR 816.

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The foregoing suggests that the CBM Directive, as implemented by the Regulations and interpreted by the UK court, has achieved its goal to facilitate cross-border mergers. Moreover, from a dynamic perspective, the Cross-Border Merger Directive makes regulatory arbitrage easier.53 The Cross-Border Mergers Directive provides a positive forum shopping opportunity for non-UK companies to use the service of a UK court to achieve their restructuring. A distinction here is made between negative and positive forum shopping. Without using the phrases “positive” and “negative” forum shopping, this distinction was well explored in Atlantic Star v Bona Spes. Positive forum shopping occurs “where the plaintiff comes to the UK court in order to obtain a remedy where none is available in alternative jurisdictions” and negative forum shopping occurs “where he comes here in order to obtain a better remedy than that applied by a more appropriate court.”54 UK courts will discourage negative forum shopping where the case has no connection with the UK.55 In effecting crossborder mergers, the CBM Directive, as implemented by the Regulations, provides the connection for positive forum shopping. The connection with the UK that allows non-UK companies to use the UK forum is that the Regulations require that one of the merging companies must be a UK company. This connection is easily fulfilled by the non-UK companies using the UK forum to merge into a shelf UK company.

4 Schemes of Arrangement and Cross-Border Mergers It is worth comparing the English schemes of arrangement with the EU cross-border mergers. The question here is whether the EU cross-border mergers can displace the English schemes of arrangement in effecting cross-border restructuring of companies. In the UK, it is unlikely that the EU cross-border merger can displace the English schemes of arrangement, for the following reasons: (a) schemes of arrangement are long rooted in English law, (b) the jurisdiction of UK courts for schemes of arrangement is wider than that for cross-border mergers, and (c) lack of efficient alternatives means schemes of arrangement are more attractive than the option for cross-border mergers. These reasons are analysed in turns. Schemes of arrangements are long rooted in English law to be displaced by crossborder mergers for restructuring of companies. The current statutory provisions of schemes of arrangement are in sections 895–901 of the Companies Act 2006. But the predecessor provisions are long rooted and can be traced to sections 136–137 of the Companies Act 1862. Schemes of arrangement can be used to restructure companies, based on compromises and arrangements reached between the company and its members or creditors. One of the benefits of a scheme is the fact that it allows a

53

Enriques (2017), p. 768. Atlantic Star v Bona Spes [1974] AC 436, 442 (HL). 55 Société du Gaz de Paris v Armateurs francais [1926] SLT 33; Boys v Chaplin [1971] AC 356. 54

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majority of the members or creditors to bind the minority.56 As early as 1877, UK courts were applying the statutory provisions of schemes of arrangement. In Stone v The City and County Bank Ltd, Lindley J ruled that once a scheme of arrangement had been agreed under section 136 of the Companies Act 1862, the resolution binding on all the shareholders.57 The requirement for 75% of the members or creditors to sanction a scheme is well established since 1862. In George Wilson and Others v John Wilson and Others, the law was restated that “the 136th section of the Companies Act, 1862,” required “three-fourths in number and value of the creditors” to sanction any arrangement between the company and its creditors.58 Section 899 of the Companies Act 2006 requires “a majority in number representing 75% in value of the creditors or class of creditors or members or class of members” to “agree a compromise or arrangement” to be sanctioned by the court. The statutory provisions for the English schemes of arrangement are well established, having undergone revisions dating back to 1862,59 and thus unlikely to be displaced by the recent EU cross-border mergers as a means for restructuring companies. The jurisdiction of UK courts for schemes of arrangement is wider than that for cross-border mergers. For cross-border mergers, UK courts will have jurisdiction if at least one of the companies is a UK company and at least one of the companies is an EEA company.60 The companies must be in substance, not merely in form, UK and EEA companies. In Re Easynet Global Services Ltd, where the only one EEA company was only in form and a mere device, Birss J said the transaction does not fall in the jurisdiction of the court, for while it was a merger, it was not, in reality, a cross-border merger at all.61 For schemes of arrangement, UK courts will have jurisdiction to sanction a scheme between creditors or members of “any company liable to be wound up under the Insolvency Act 1986,”62 even where the companies are not UK or EEA companies. In Re NEF Telecom Co BV,63 Vos J said, the jurisdictional provision in section 895 of the Companies Act 2006 required that the scheme companies were liable to be wound up under the Insolvency Act 1986, and for those purposes, a sufficient connection was required with the English jurisdiction. Consequently, under domestic English law, the UK court has jurisdiction, under the Insolvency Act 1986, to wind up a foreign company, and a foreign company (solvent or insolvent) can 56

Payne (2013), p. 566; for detailed understanding of schemes of arrangement, see Payne (2014). (1877) 3 CPD 282. 58 George Wilson and Others v John Wilson and Others (1878) 5 R 867. 59 Starting from section 136 of the Companies Act 1862, through section 2 of the Joint Stock Companies Arrangements Act 1870, section 24 of the Companies Act 1900, section 38 of the Companies Act 1907, section 120 of the Companies (Consolidated) Act 1908, section 153 of the Companies Act 1929, section 206 of the Companies Act 1948, section 425 of the Companies Act 1985, to section 895 of the Companies Act 2006. 60 Companies (Cross-Border Mergers) Regulations 2007, reg 2. 61 [2017] BCC 20, 28. 62 Companies Act 2006, s 895(2)(b). 63 [2012] EWHC 2944 (Ch); [2014] BCC 417. 57

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potentially make use of the English scheme jurisdiction.64 In Re Rodenstock GmbH, the connection with the jurisdiction of the UK constituted by the choice of English law and the exclusive jurisdiction clause was a sufficient connection to enable the court to exercise its discretion to sanction the scheme.65 In Primacom Holding GmbH v A Group of the Senior Lenders & Credit Agricole, the connection with England was that every one of the loan agreements and also the umbrella agreement was expressly governed by English law and expressly nominated the UK forum as the exclusive forum for the adjudication of their disputes.66 With such a wide jurisdiction enjoyed by UK courts, it is unlikely that schemes of arrangements will be displaced by cross-border mergers. The lack of efficient alternative options and the search for favourable jurisdictions for restructuring companies will continue to attract non-UK companies to English schemes of arrangement, which may not command the same attractiveness as the option for cross-border mergers. Non-UK companies resorting to UK courts may be seen as forum shopping, but parties are free to use favourable jurisdictions. In Re Algeco Scotsman PIK SA, Hildyard J said that although forum shopping is used as a pejorative description of a situation where a company resorts to an inappropriate court for inappropriate purposes, “a company’s resort to the English court for a scheme of arrangement is understandable given the lack of any viable or efficient alternatives.”67 In Staubitz-Schreiber, Advocate General Colomer was of the opinion that, if forum shopping is defined as the search by a plaintiff for the international jurisdiction most favourable to his claims, it is not open to criticism, and that “forum shopping is merely the optimisation of procedural possibilities and it results from the existence of more than one available forum, which is in no way unlawful.”68

5 Popularity of Takeovers Versus Mergers The assessment of the impact of the Cross-border Mergers Directive in the UK would not be complete without comparing takeovers with cross-border mergers as means of restructuring of companies. The distinction between takeovers and mergers is generally blurred, especially when the term Mergers and Acquisitions (“M&A”) is used as an umbrella term for both. Acquisitions are transactions in which the acquirer (usually a company) uses capital (shares or cash) to acquire/obtain shares in another

64

Payne (2013), p. 570. [2012] BCC 459, 476 per Briggs J. 66 [2013] BCC 201, 223 per Hildyard J. 67 Re Algeco Scotsman PIK SA (unreported) 22 June 2017 (Ch) per Hildyard J. 68 Case C-1/04 Susanne Staubitz-Schreiber [2006] ECR I-701, para 71–72 (Opinion of Mr Advocate General Ruiz-Jarabo Colomer delivered on 6 September 2005); see also Case C-343/04 Land Oberösterreich v ČEZ as [2006] ECR I-4557, para 85 (Opinion of Mr Advocate General Poiares Maduro delivered on 11 January 2006). 65

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company. The acquiring company tends to be larger than the target company. Takeovers are acquisitions aimed at gaining control of the target company. The EU Takeover Directive defines a takeover bid as a public offer to acquire all or some securities in an offeree company, which offer has as its objective the acquisition of control of the offeree company in accordance with national law.69 German law provides this better: “Takeover bids are offers which are aimed at gaining control. Control is the holding of at least 30 per cent of the voting rights in the target company.”70 In the UK, the 30% threshold for gaining control has a longstanding pedigree—first provided as rule 34 in the 1972 edition of the Takeover Code. Ruling on the old rule 34, in Weyburn Engineering Company Ltd, the Takeover Panel stated that it was its practice “to regard a holding of 30% or more of the equity as conferring effective control.”71 Mergers refer to the merging of two or more previously legally separate companies into one resulting company. There tends to be a buying party in most mergers—the transferee company buying the majority or all the shares of the transferor companies. Frequently, acquirers control acquired boards such that it is not truly a merging of equal relations. As such, most mergers, although styled as mergers, are in substance takeovers, as the acquirer gains control of the acquired companies. Nonetheless, even with such a blurred distinction between takeovers and mergers as relates the practice of M&A, takeovers have greater advantage over cross-border mergers. Arguably, for the purpose of freedom of establishment, it does not matter whether an M&A transaction is a takeover or a cross-border merger, but that national law gives effect to the obligations of the Member State not to restrict freedom of establishment. The Takeover Directive sought to enable Member States to remove barriers to freedom of establishment in order to facilitate company restructuring by way of takeover activities.72 The CBM Directive sought to enable Member States “to remove impediments to freedom of establishment” in order to facilitate cross-frontier restructuring of merging of companies.73 The CBM Directive was the result of the EU’s view that, in order to facilitate efficient consolidation between companies within the EU’s single market, Member States should be required to facilitate cross-border mergers.74 Both the Takeover Directive and the CBM Directive have long been implemented in the UK, and implemented in a manner consistent with freedom of establishment. By cross-border mergers, companies now have an additional means to takeovers for exercising freedom of establishment. The debate here

69 Article 2(1), Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJ L142/12. 70 Securities Acquisition and Takeover Act [Wertpapiererwerbs- und Ubernahmegesetz] (“WpUG”), s 29. 71 Takeover Panel, The Weyburn Engineering Company Ltd (1973/15) 3—accessed on 10 August 2017 at http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/12/1973-15.pdf. 72 Mukwiri (2009), p. 7. 73 Rickford (2005), p. 1396. 74 Kershaw (2016), p. 61.

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is about which of the two options for restructuring companies involving a UK company is more popular and the underpinning reasons for that popularity. The question here is whether the cross-border mergers can displace takeovers in effecting cross-border restructuring of companies. It is argued, for the following reasons, cross-border mergers are unlikely to displace takeovers: (a) the shareholderoriented nature of takeovers is more favourable to investors and therefore unlikely to be displaced by a stakeholder-oriented cross-border mergers regime in the UK; (b) takeovers have advantage over cross-border mergers in that takeovers are transactions that are easy to undertake in the course of business without affecting the legal status of the companies involved; (c) the regulation of takeovers is more attractive given its advantage of speed (at least where the target is in the UK) than cross-border mergers; (d) the takeover avoids all questions of employee participation: the bidder and target remain subject to whatever, if anything, their national laws provide in this regard; and (e) the provisions for takeovers provide a more commercially fair deal than those of cross-border mergers to minority shareholders. These five reasons are analysed in turns. First, the shareholder oriented nature of regulation of takeovers in the UK favours takeovers than cross-border mergers as a means of restructuring of companies. The UK corporate landscape is strikingly shareholder orientated. The Takeover Code is shareholder oriented. In contrast, the Regulations on cross-border mergers are stakeholder oriented. The core rule in the Code constrains target company directors from frustrating a takeover bid so as to allow shareholders to decide whether or not to accept the offer.75 Unlike the regulation of cross-border mergers that pays much attention to any applicable employee participation rights, the Takeover Code facilitates the rights of shareholders to decide on the takeover bid. It is less complex for a non-UK company to takeover a large UK company than to absorb it through a crossborder merger. For instance, in the context of a widely held public company, the procedural requirements of the Regulations (and those applicable under domestic law to the non-UK merging company) may be more complex and result in an extended transaction timetable when compared to a traditional takeover offer.76 Takeovers are easily achieved in the UK than in other EU jurisdictions. Most takeover activities in the EU take place in the UK than in any other European country.77 Potential investors are highly incentivised by the shareholder-oriented UK system to continue restructuring through takeovers. It is unlikely that a less favourable cross-border mergers regime will displace the popularity of takeovers. In regard to the shareholder-oriented nature of takeovers, to that the extent that a takeover is essentially decided by individual shareholders, it has advantage over a cross-border merger decided by stakeholders. The takeover process begins with due diligence undertaken by the bidder to ascertain the viability of a takeover. Once the bidder is ready, an approach is made to announce a takeover bid. There are

75

The City Code of Takeovers and Mergers (Twelfth edition, 12 September 2016), rule 21. Smith (2013), p. 225. 77 Mukwiri (2017), update 63. 76

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procedural rules, including providing information about the takeover bid to shareholders so they make an informed choice. Consequently, if the price is fair, it may attract shareholders to accept the offer and the takeover would be successful. For takeovers, there is no requirement for target company’s board approval or target company’s general meeting of shareholders to approve or for a meeting of target company’s creditors to approve, as is for mergers. All it takes for takeovers is for informed target company’s shareholders to accept or reject the takeover offer. Second, takeovers have advantage over cross-border mergers in that takeovers are transactions that are easy to undertake in the course of business without affecting the legal status of the companies involved. While cross-border mergers affect the legal structure of the company, takeovers affect only the share-ownership in the company. Cross-border mergers are transactions between two or more companies, as approved by the shareholders or/and creditors, for restructuring of the companies. Takeovers are transactions between the bidder (legal or natural person) and the shareholders of the company for the purchase of shares in the company. Cross-border mergers require the approval and decision of the board of directors, while takeovers are decided by shareholders through acceptance of the bid and need no board approval. In a cross-border merger, the sanction of the court is required, while takeovers require no court approval. Cross-border mergers involve change of the identity of the company as an entity, while takeovers involve change of identity of the holders of the shares in the company. While takeovers could have a comparable effect to cross-border mergers of restructuring companies, leaving the companies in existence, the latter go beyond mere restructuring and include absorbing one or more of the companies so that the absorbed company cease to exist. As cross-border mergers change the legal structure of the companies, they are not easy to undertake in the course of business for companies involved. To the extent that takeovers leave the company’s legal status unaffected, they have advantage over cross-border mergers. The ease of effecting takeovers in the course of business makes takeovers more popular than cross-border mergers and the latter is hence unlikely to displace takeovers. Third, the takeover has a major advantage in terms of speed (at least where the target is in the United Kingdom).78 Takeovers have since 1968 been regulated by the Takeover Panel on Takeovers and Mergers (the “Panel”), a body that is the competent supervisor for takeovers, and governed by the Takeover Code. The hallmarks of the Panel’s takeover regulation are speed, flexibility and certainty of decision marking.79 In general, “untrammelled by the procedural and precedential niceties of the courtroom, the Panel responds in a flexible and well-informed fashion to disputes and governs their resolution in ‘real time’”.80

78

Davies and Worthington (2012), p. 1122. The Takeover Panel, The European Directive on Takeover Bids, Explanatory Paper (The Panel on Takeovers and Mergers, London 20 January 2005). 80 Amour and Skeel (2007), p. 1729. 79

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Panel has always enjoyed a jurisdiction of ruling on takeovers without the intervention of the courts that would hinder speed. In Guinness, Sir Donaldson MR said that “when the takeover is in progress the time scales involved are so short and the need of the markets and those dealing in them to be able to rely on the rulings of the Panel is so great that contemporary intervention by the court will usually either be impossible or contrary to the public interest”.81 In Datafin, Sir Donaldson MR said that “in the light of the special nature of the panel, its functions, the market in which it is operating, the time scales which are inherent in that market and the need to safeguard the position of third parties” required the “court to allow contemporary decisions to take their course, considering the complaint and intervening, if at all, later and in retrospect”.82 In changing from self-regulation to statutory regulation in 2006 when the Takeover Directive was implemented in the UK,83 the Panel retained its hallmarks of speed, jurisdiction, and practices within a statutory framework. The timeline for a takeover is underpinned by speed. In contrast, decisions on cross-border mergers, which are scrutinised and sanctioned by the court, do not command the same speed as decisions on takeovers. When seeking to absorb a larger UK public company through the cross-border provisions, the complexity of transfer of property and liabilities of the merging companies, will not only slow transactional speed but also render the merger unattractive compared to an alternative restructuring through a takeover. The simplicity of the property transfer regime in a takeover, with the substantial tax advantages consequent on an absence of transfers of title to assets, will be a major advantage for a takeover.84 Fourth, the takeover avoids all questions of employee participation: the bidder and target remain subject to whatever, if anything, their national laws provide in this regard.85 For large UK public companies, the complexity of employee participation (if that apply) would render the merger unattractive compared to a takeover. Employee participation is less onerous for takeovers than for cross-border mergers. In UK takeovers, the Takeover Code requires that the target board’s opinion, given to shareholders, should include how they think the takeover will affect the interests of employees.86 The opinion of employee representatives on the effect of the takeover is required to be appended to the board’s opinion. Having received the board’s opinion and any employee representatives’ opinion, it is ultimately the decision of shareholders, decided individually, to accept the bid offer or reject the 81

R v Panel on Takeovers and Mergers ex parte Guinness [1989] 1 All ER 509, 512 (per Sir Donaldson MR). 82 R v Panel on Takeovers and Mergers, ex parte Datafin plc [1987] QB 815, 842 (per Sir Donaldson MR). 83 Takeover Directive 2004/25/EC was implemented in the UK by the Interim Regulations 2006, and later by the Companies Act 2006 (which in turn empowers the Panel to make and administer rules in the Takeover Code). 84 Rickford (2005), p. 1412. 85 Davies and Worthington (2012), p. 1123. 86 City Code on Takeovers and Mergers (Twelfth edition, 12 September 2016), rule 25.

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offer. In the UK, employees cannot frustrate a takeover bid. In the UK, employees have no participation right in a takeover beyond simply giving their opinion and then hoping that shareholders will be influenced by such opinion to reject the offer. If the price is right, unless the interests of shareholders are fully aligned with those of employees, it is unlikely that shareholders would reject the offer on the basis of the likely disadvantage to the interests of employees. By contrast, negotiations for employee rights under the employee participation regime in cross-border mergers can be protracted. The law applicable to employee rights in cross-border mergers is the national law of a Member State where the transferee has its registered office.87 If the transferee is a UK company, given that the UK does not mandate employee participation, in order to offer the same level of protection to employees of a merging company that has its registered office in a jurisdiction with mandatory employee participation rights, employee participation is required by default if one of the following conditions apply: (a) a merging company has, in the 6 months before the publication of the draft terms of merger, an average number of employees that exceeds 500 and has a system of employee participation, or (b) a UK merging company has a proportion of employee representatives amongst the directors, or (c) a merging company has employee representatives amongst members of the administrative or supervisory organ or their committees or of the management group which covers the profit units of the company.88 In effect, employee participation would apply to most large merging companies with over 500 employees, and only the small merging companies would avoid employee participation. In addition, employee participation would be avoided where the merging companies are from jurisdictions that have no employee representative on their boards. The scope of avoiding employee participation in crossborder mergers is very narrow. This in and of itself would make takeovers more attractive than cross-border mergers for companies wishing to avoid the protraction of negotiating employee rights before the cross-border merger is sanctioned. Fifth, the provisions for takeovers provide a more commercially fair deal than those of cross-border mergers to minority shareholders. Minority shareholders here refer to those who oppose the merger or refuse to accept a takeover offer. The uncertainty in cross-border mergers is caused by the fact that under the CBM Directive, “minority protection is optional, not compulsory.”89 A Member State may adopt under its law provisions for compensating minority shareholders.90 Where a merging company that is required by its national law to compensate

87

CBM Directive, Articles 2(1) and 14(1). Companies (Cross-Border Mergers) Regulations 2007, reg 22. 89 Wyckaert and Geens (2008), p. 288; for more on minority protection in cross-border mergers, see Kurtulan (2017). 90 CBM Directive, Article 4(2). 88

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minority shareholders, it shall only compensate if the other merging companies not subject to such obligation explicitly accept at the time of approving the draft terms of the cross-border merger.91 Thus, the CBM Directive fails to provide a commercially fair deal for minority shareholders. The Regulations are silent on compensation of minority shareholders. The Regulations require that the merger be approved by a majority of shareholders in number representing 75% in value, of each class of members of the UK merging company. Thus, the minority shareholders are locked into the merger with neither exit option nor compensation. Takeover regulation provide “squeeze-out” rights to the bidder who have, by virtue of acceptances of the offer, acquired or unconditionally contracted to acquire not less than 90% in value of the shares to which the offer relates and 90% of the voting rights carried by the shares to which the offer relates, to compulsorily buy the remaining shares.92 Takeover rules provide “sell-out” rights to minority shareholders to require the bidder to buy their shares.93 The squeeze-out right is valuable to bidders as it prevents the minority exploiting its hold up power in circumstances where the bidder has good reasons to move to 100% ownership.94 To facilitate investors in restructuring of companies, the commercial practice in takeovers is to treat minority shareholders who refuse to sell when offered a fair price as free riders. In anticipating an increased post-takeover share value, shareholders may hold out during the bid, and hope to sell at a later stage, creating the free rider problem. The law’s response, favouring the majority, is to clear the market of free riders, furthering the corporate restructuring objective, by facilitating the bidder in squeezing-out the minority shareholder. The squeeze-out allows the bidder to overcome the free rider problem.95 The squeeze-out right of a bidder cannot be defeated on ground that the minority shareholder does not wish to sell his shares. In Re Bugle Press Ltd, Buckley J said that “where the 90 per cent majority who accept the offer are unconnected with the persons who are concerned with making the offer, the court pays the greatest attention to the views of that majority.”96 Moreover, the onus is on the minority shareholder to prove that the offer was unfair.97 The test of fairness is not on whether it is fair for a minority’s liberties of investment to be removed, but on whether the price offered to the minority in return is a commercially acceptable offer price.

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CBM Directive, Article 10(3). Article 15 of the Takeover Directive 2004/25/EC; Companies Act 2006, s 979. 93 Companies Act 2006, s 984(2). 94 Payne (2011), p. 76. 95 Burkart and Panunzi (2004), p. 793. 96 In Re Bugle Press Ltd [1961] Ch 270, 276–277 per Buckley J. 97 Re Gierson, Oldham and Adams Ltd [1968] Ch 17. 92

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6 Challenges of Brexit to Cross-Border Mergers Brexit refers to Britain exiting the EU. On 23 June 2016, the UK held a referendum and the electorate voted to leave the EU. On 29 March 2017, the UK government invoked Article 50 of the Treaty on the European Union. If or when the UK exits the EU, the CBM Directive may cease to govern cross-border mergers in the UK. The Companies (Cross-Border Mergers) Regulations 2007, which implemented the CBM Directive, may also cease to apply post-Brexit. Post-Brexit, cross-border merger laws in the remaining EU Member States may no longer recognise the UK companies as EEA companies under the CBM Directive regime. It will all depend on the Brexit negotiations made between the EU and the UK. The UK may join any of the three existing alternatives: (1) membership of the European Economic Area (EEA), like Norway; or (2) a negotiated bilateral agreement, such as that between the EU and Switzerland, Turkey or Canada; or (3) World Trade Organization (WTO) membership without any form of specific agreement with the EU, like Russia or Brazil.98 As an EU major trading partner, the UK may seek a “unique model”, as desired by the UK Government.99 If the so-called “hard Brexit” is the result of the EU/UK negotiations, cross-border mergers involving EEA and UK companies may become restrictive. Arguably, whilst Brexit may reduce cross-border mergers in the UK, if national laws of EEA countries do not preclude, EEA companies may continue using the English schemes of arrangement to access the service of UK courts in restructuring their companies. Moreover, as takeovers have advantage over cross-border mergers, the loss of the latter may simply re-channel those EEA companies into the former method of restructuring their companies in the UK. To the extent that EEA companies continue to prefer using the UK court to restructure their companies, they are likely to use English schemes of arrangement as alternative to cross-border mergers. There is pre-Brexit evidence showing that a number of EEA companies in other EU Member States have found it attractive to use the English schemes of arrangement. In Re Rodenstock GmbH,100 a German company with its centre of main interests (COMI) in Germany, chose to restructure using the English scheme of arrangement. The UK court had jurisdiction on the basis that English law governed the debt facilities agreement, which granted exclusive jurisdiction to the UK courts. In Primacom Holding GmbH v A Group of the Senior Lenders & Credit Agricole,101 another German company, whose loan facility was governed by English law, chose an English scheme of arrangement. In Re Cortefiel SA,102 a Spanish company and a HM Treasury, “The Long-Term Economic Impact of EU Membership and the Alternatives” (April 2016) p. 8. 99 Allen, Pickard, Mance, “Post-Brexit Britain to Seek ‘Unique’ model as great trading state” (2016) Financial Times, 31 August. 100 [2011] EWHC 1104 (Ch); [2011] Bus LR 1245. 101 [2012] EWHC 164 (Ch); [2013] BCC 201. 102 [2012] EWHC 2998 (Ch). 98

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Luxemburg company chose the English scheme of arrangement. In Re Seat Pagine Gialle SpA,103 an Italian company, which had its COMI in Italy, chose the English scheme of arrangement. If the cross-border mergers provisions cease post-Brexit, it is likely that this trend of non-UK companies choosing the UK court will continue, with companies using English schemes of arrangement as alternative to cross-border mergers. UK courts would accept jurisdiction to sanction a scheme of arrangement in relation to foreign companies where a “sufficient connection” with England is shown.104 The “sufficient connection” is easily satisfied by the non-UK company’s relevant document are governed by English law or gave jurisdiction to UK courts. In Tele Columbus GmbH,105 involving four German companies, Morgan J had no hesitation sanctioning the scheme where the contractual terms were governed by English law and contained a clause that England had exclusive jurisdiction. An amendment to the relevant documents would be sufficient to give UK courts jurisdiction. In Re APCOA Parking Holdings GmbH and others (No 2),106 a scheme of arrangement for German companies with no COMI in England, was sanctioned as having “sufficient connection” after the companies changed the law governing their financial documents from German law to English law. Sanctioning the scheme, Hildyard J warned that a UK court “would be careful” in sanctioning a scheme where the changed choice of law “appeared entirely alien” or “had no discernible rationale” other than to favour the majority “at the expense of the dissentients” or seemed to court to be a “step too far”.107 In Re Algeco Scotsman PIK SA, a recent 2017 case involving a Luxembourg company, the lending arrangement’s governing law and jurisdiction clauses were amended to English law and a waiver for the company to take the requisite steps to establish a sufficient connection with England was made to enable a scheme of arrangement to take place under English law.108 Moreover, if or when cross-border mergers provisions cease to apply post-Brexit, the lack of viable or efficient options and the search for favourable jurisdictions for restructuring companies may re-channel EEA companies to the use of takeovers. The Takeover Directive may cease to apply post-Brexit. This will not cause a material change to the UK. It might be that nothing changes, for the UK Government’s White Paper says that the Great Repeal Bill “will preserve all the laws we have made in the UK to implement our EU obligations.”109 Regardless, the UK Code on Takeovers and Mergers will continue to govern takeovers in the UK. Most

103

[2012] EWHC 3686 (Ch). Re Real Estate Development Co [1991] BCLC 210; Re Drax Holdings Ltd [2003] EWHC 2743 (Ch); [2004] WLR 1049. 105 [2014] EWHC 249 (Ch). 106 [2014] EWHC 3849 (Ch); [2015] Bus LR 374. 107 [2015] Bus LR 374, 435 per Hildyard J. 108 Re Algeco Scotsman PIK SA (unreported case that came before Hildyard J), 22 June 2017. 109 Department for Exiting the European Union, “Legislating for the United Kingdom’s Withdrawal from the European Union” (March 2017) Cm 9446, para 2.5. 104

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takeover activities in Europe take place in the UK than any other European country. If the continental-type mergers cease to be sanctioned in the UK, the absence of cross-border mergers may pave way to more takeover activities in the UK. The fact that the Takeover Directive was modelled on the UK Takeover Code, the inapplicability of the Takeover Directive post-Brexit is unlikely to affect UK takeover regulation. As the UK has always led the EU in takeovers, the UK’s Takeover Panel is likely to continue developing UK takeover regulation to attract the participation of EEA companies.

7 Conclusion This paper has assessed the impact of the CBM Directive in the UK, as implemented by the Regulations, with a particular review of cases decided by the UK court between 2007 and 2017. The reviewed cases reveal a consistent pattern that the UK court has applied the provisions in a manner that constructively facilitates crossborder mergers in the UK. It has argued that cross-border mergers are attractive to companies with no or few employees, for which employee participation provisions are inapplicable. For large UK companies with more than 500 employees, crossborder mergers will be unattractive due to the complexity of negotiating employee participation agreements prior to approval of proposed mergers. To such large UK companies the takeover will remain the attractive method of restructuring. It has argued that CBM Directive and the Regulations provides a positive forum shopping opportunity for non-UK companies to use the service of a UK court to achieve their restructuring. The cases reveal the willingness of the UK court to facilitate cross-border mergers by interpreting the provisions of both CBM Directive and the Regulations in a constructive way, even allowing EEA companies to be merged into shelf UK companies. But despite the facilitation of cross-border mergers, it has argued that these are unlikely to displace the English schemes of arrangement and the takeover method of restructuring companies in the UK. Schemes of arrangement are unlikely to be displaced because: (a) they are long rooted in English law, (b) they are covered by a wider jurisdiction of the UK court, and (c) lack of efficient alternatives means they remain more attractive. Takeovers are unlikely to be displaced because: (a) they are by their shareholder-oriented nature more favourable to investors, (b) they have the advantage of being capable of being easily undertake in the course of business without affecting the legal status of the companies involved, (c) they have the advantage of regulatory speed, (d) they avoid all questions of employee participation, and (e) they provide commercially fair deal to minority shareholders. It has also argued that, if or when the CBM Directive ceases to apply in the UK post-Brexit, the vacuum of cross-border mergers may lead to more takeovers in the UK and EEA companies using the English schemes of arrangement. It will all depend on the outcome of the Brexit negotiations made between the EU and the

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UK. Whatever form of Brexit, one thing is sure: the UK court will accept jurisdiction to sanction schemes of arrangement relating to EEA or non-UK companies if sufficient connection with England is shown, which connection is easily established by amending the relevant companies’ documents to provide for choice of English law and jurisdiction. To the extent that EEA companies continue to prefer using the UK court to restructure their companies, they are likely to use English schemes of arrangement as alternative to, or in absence of, cross-border mergers.

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Jonathan Mukwiri is an Associate Professor in Corporate Law at Durham Law School, Durham University, UK. His research interests lie primarily in corporate law, especially European corporate law. He has made a number of contributions to the literature in the field of corporate law. To date, his work in corporate law has focused on takeover regulation and corporate governance, including the role of shareholders and the protection of minority shareholders.