By Sébastien RIMLINGER, Avocat à la Cour, DSM Avocats à la Cour
The period that will follow the COVID-19 pandemic will result in Europe, as in the rest of the world, in an acceleration of the restructuring of companies. These restructuring transactions can take different forms, depending on the objective one seeks to attain. One of the techniques consists of merging Luxembourg and foreign companies.
The concept of cross-border mergers and the reasons justifying this type of transaction
A merger can take two distinct forms: 1) it can consist of one company absorbing another company, resulting in the dissolution without liquidation of the absorbed company and the complete transmission of the its assets and liabilities (transmission universelle de patrimoine) to the absorbing company, referred to as a merger by absorption, or 2) the two merging companies transferring to a new company that they form, following their dissolution without liquidation, the entirety of their assets and liabilities, referred to as a merger by the formation of a new company.
While the majority of mergers only involve Luxembourg companies, certain mergers involve both Luxembourg and foreign companies, such transactions are thus called cross-border mergers.
The reasons justifying this type of transaction are divers and in particular may be based on: 1) a desire for concentration to fight national and international competition; 2) a desire to reorganize and simplify the group structure composed of companies of different nationalities; or 3) a wish to reduce the costs of the merging companies by the establishment of common synergies.
The legal framework
Cross-border mergers in the Grand Duchy of Luxembourg are an old practice, even if for a long time they did not enjoy a specific legal framework.
Directive 2005/56/EC of 26 October 2005 on cross-border mergers of limited liability companies (hereafter the “Directive“) filled the legal void by creating a specific regime for cross-border mergers. The transposition of the Directive into Luxembourg law was carried out in two steps: the first in two laws of 23 March 2007, and the second in the Law of 10 June 2009. The transposition of the Directive into national law constitutes not only the recognition in Luxembourg law of mergers between companies from European Union member states, but also the recognition of mergers with companies located in third countries. We note that Luxembourg legislators, in the context of a liberal approach to company law, extended the applicable cross-border merger rules to all commercial companies, as well as to Economic Interest Groupings.
Now, cross-border mergers are governed by Articles 1020-1 et seq. of the Law of 10 August 1915 on commercial companies, as amended (hereafter the “1915 Law“).
Prerequisite for mergers
The 1915 Law authorises mergers, whether a Luxembourg company is the absorbed company (emigration merger) or the absorbing company (immigration merger), as long as the national law of the company or foreign law governed Economic Interest Grouping does not prohibit it, and the company or Economic Interest Grouping complies with its national provisions and formalities (Article 1020-1, para. 3, 1915 Law). The prerequisite is thus the foreign law’s absence of a prohibition against mergers.
At the European level, the transcription of the Directive in another member state is sufficient to indicate the absence of a prohibition.
It should be noted that the issue of the prohibition concerns solely international mergers. That is, the merger between a Luxembourg company and a company established outside of the European Union.
The regime of mergers between European companies
Common draft terms of merger (projet commun de fusion)
The administrative or managing bodies of each of the companies wishing to merge must establish common draft terms of merger.
This document does not bind the companies, but its objective is to inform third parties and the shareholders. The merger will only be validly if effectuated by a decision of the merging companies’ general meeting of shareholders.
The common draft terms of merger are in the form of a deed signed under private seal or a notarized deed.
The common draft terms of merger must contain the elements listed in Article 1021-1 of the 1915 Law. Certain elements are excluded from the common draft terms of merger pursuant to Article 1023-1 of the 1915 Law.
The common draft terms of merger must be published in the electronic trade register (Recueil Électronique des Sociétés et Associations) at least one month before the merging companies’ general shareholder meetings called to deliberate on the merger (Article 1021-2, 1915 Law).
Merger supporting documents
To provide complete information to shareholders, Article 1021-7 of the 1915 Law provides that at least one month prior to holding the general shareholder meeting called to deliberate on the common draft terms of merger, the shareholders must be able to consult the following documents at the company’s registered office: 1) the common draft terms of merger; 2) the merging companies’ annual accounts as well as their management reports for the last three financial years; 3) an intermediate financial situation not less than three months old with respect to the merger; 4) an independent expert report; Article 1021-5 of the 1915 Law also provides that a report written by each of the merging companies’ administrative or management bodies explaining and economically and legally justifying the merger must be made available to the shareholders and personnel representatives, or if there are none, to the salaried employees themselves.
Shareholders are also entitled to obtain a complete or, if they so wish, a partial copy of these documents free of cost and upon request (Article 1021-7 (3), 1915 Law).
A company is relieved of the obligation to make the documents available at its registered office if, for a continuous period starting at least one month before the day set for the general shareholder meeting called to deliberate on the common draft terms of merger and not ending before the general shareholder meeting finishes, it makes them available on its website (Article 1021-7 (4), 1915 Law).
Certain exemptions apply with respect to the supporting documents, thus shareholders can waive the independent auditor report and in certain cases the administrative body’s written report (Articles 1021-5 et 1021-6, 1915 Law).
Shareholder general meetings
Each of the merging companies’ shareholders must, during an extraordinary shareholder general meeting held before a notary, decide on the merger (Article 1021-12, 1915). The shareholders’ vote requires the quorum and majority for amendment of the articles. However, Article 1021-3 of the 1915 Law provides for a certain number of cases requiring a qualified majority.
The notary must verify and attest to the existence and legality of the deeds and formalities of the company for which he/she is acting. He/she will issue a certificate attesting to the correct completion of the deeds and formalities prerequisite to the merger with respect to Luxembourg law.
In certain European countries, it is the commercial court that issues the certificate.
Effects of the merger
Pursuant to the Directive, the legal effective date of a merger by absorption is determined by the absorbing company.
In a merger by the formation of a new company, the legal effective date cannot be prior to the date of the new company’s registration.
The accounting effect of a merger can differ from the merger’s legal effective date.
Employment contracts will be transferred to the absorbing company on the merger’s effective date (Article 1021-17, 1915 Law).
The international merger regime
In international mergers, the first condition to verify is that the foreign company’s national law does not prohibit the type of merger contemplated.
In principle, the regime applicable to international mergers is identical to the regime for mergers of European companies. However, there may be certain differences pursuant to the foreign company’s applicable legislation. Thus, the 1915 Law should be interpreted in application of the lex societatis of the foreign company, Article 1021-3 of the 1915 Law which requires holding general shareholder meetings by each of the merging companies must be interpreted as appointing the body in charge of authorizing the merger under the foreign law, even if it does not hold a general shareholder meeting.
In conclusion, it is possible to predict that the number of cross-border mergers will continue to increase in the coming years, for reasons associated with the economic conditions, but also because of the will of European authorities. Notably, this European will is translated by the entry into force of the new European Directive 2019/212 of 27 November 2019, not yet transposed in Luxembourg, on cross-border conversions, mergers and divisions.