27 November 2006
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The ECJ’s ruling on cross-border mergers has been watched closely by a number of companis in the German market. By Jack Schiffer
The European Court of Justice (ECJ) rendered a remarkable decision almost a year ago, which, for the first time in Germany, allowed a cross-border merger between a Luxembourg (Security Vision Concept SA) and a German (Sevic Systems AG) corporation.
The upstream merger whereby Security Vision was to be merged into Sevic was opposed by the commercial register in Neuwied, which refused the registration of the merger on the basis that Germany’s Transformation Act only applied to mergers where the participants were German entities.
Sevic filed an appeal against this decision to the Koblenz District Court, which submitted the issue to the ECJ, which in turn decided in favour of Sevic on 13 December 2005. The ECJ clearly stated that national law of a member state prohibiting the acknowledgement of upstream mergers between a German entity and an entity domiciled in another EU member state and its registration in the national commercial register clearly contradicts Article 43 (freedom of settlement) and Article 48 (equal treatment of companies) of the EU Treaty.
However, the decision leaves open a number of practical questions that need to be resolved in order to successfully convince a German commercial register to actually register a cross-border merger. These questions relate to the place of notarisation of the merger agreement, its language, the timely order of the registrations into the commercial register, evaluation principles applicable for the merged company etc. It remains to be seen whether these open issues will be adequately dealt with in subsequent legislation.
On 15 December 2005 the EU Directive 2005/56/EC on the merger of corporations from different member states came into force and member states now have until December 2007 to transform this into national law.
The German government presented a draft of a second law for the amendment of the Transformation Act to the German parliament on 12 October 2006. It is expected that this draft will be enacted with minor amendments in the course of next year. But until that time, the Sevic decision remains applicable.
The pièce de résistance of the draft is found in Chapter 10, entitled ‘Cross Border Merger of Corporations’, which is being introduced into the existing Transformation Act. A cross-border merger is defined as a merger between two corporation of different EU or European Economic Area (EEA) member states.
Only corporations in the sense of the EU Directive 2005/56/EC can be parties to a cross-border merger. Instead of a merger agreement a merger plan is to be jointly prepared by the management of the corporations participating in the merger. This plan, among others, has to contain the following information:
• a description of the participating corporations;
• the exchange ratio of the shares;
• the effects of the merger on the employees;
• the effective date of the merger;
• the articles of association of the surviving corporation;
• detailed regulations on the employees’ co-determination rights in the surviving corporation; and
• information on the valuation of the assets and liabilities of the merged corporation.
The merger plan must be notarised. The merger plan is to be submitted to the commercial register which has to publish the plan together with other relevant information. The filing must be made at least one month prior to the meeting of the shareholders where the consent to the merger plan is to be resolved. After a proper review the competent court issues a merger certificate. The surviving company has to apply for the registration of the complete merger to the commercial register. The merger certificates of all companies to be merged and the joint merger plan must be attached to the application. After reviewing the documents the court registers the merger into the commercial register and informs each register where any of the companies to be merged had to submit their documents.
The above description of the new act only relates to the regulations that need to be observed as regards German companies participating in a cross-border merger either as a merged or as a surviving company. In each such case, however, the cross-border merger provisions of the other member states where corporations participating in the cross-border merger are domiciled also have to be observed. At the present date no EU or EEA member state has yet implemented the transformation of the EU Directive 2005/56.
The European Commission expects the first national laws to be enacted in spring 2007. Consequently, cross-border merger provisions in at least two EU or EEA member states need to be observed in order to successfully comply with all the applicable requirements. Despite these formal difficulties, it can be expected that once the legal framework has been set up in the member states, the amount of cross-border mergers will increase thus leading to a further integration of the European economy.
The European Company (SE)
In the context of internationalisation of German company law the recent developments of the European Company (Societas Europaea (SE)) are to be considered. Although the legal ramifications for the incorporation of an SE have already been in place in Germany since December 2004 the announcement of the Munich-based insurance giant Allianz AG made in September 2005 to convert its corporate structure into an SE led to an extensive discussion of the SE and its implications in Germany including, in particular, the co-determination issues. A number of German companies such as Fresenius, Siemens and ThyssenKrupp have announced that they contemplate a conversion into an SE.
Recently, MAN B&W Diesel AG was converted into MAN Diesel SE. It appears that there will be more SEs to be incorporated or converted in Germany and elsewhere in Europe in the near future. The advantages of an SE are quite obvious.
It can be incorporated in any EU or EEA member state.
• Two board systems can be adopted at the discretion of the shareholders: the Anglo-Saxon one-tier and the continental two-tier (management board and supervisory board) system.
• Co-determination can be improved in favour of the shareholders as a result of negotiations by a specially installed negotiations committee.
An SE can be formed by a merger of at least two stock companies in different member states. A Holding SE can be formed by at least two stock companies or limited-liability companies in different member states or by stock companies or limited-liability companies of one member state having had subsidiaries or branches in another member state for at least two years.
An Affiliate SE can be formed by corporations or partnerships in two different member states or by corporations or partnerships in one member state having had subsidiaries or branches in another member state for at least two years. The minimum registered equity capital of an SE is E120,000 (£81,400).
Jack Schiffer is a partner at Beiten Burkhardt