A practical view on intra-EU cross-border mergers

May 2021 | EXPERT BRIEFING | MERGERS & ACQUISITIONS

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The number of cross-border mergers within the European Union (EU) and the European Economic Area (EEA) has increased significantly over the past few years. This has been principally fuelled by the creation of a harmonised framework that makes cross-border mergers a swift and predictable corporate restructuring solution at the EU level. However, there are still some obstacles, such as gaps and inconsistences between the different legal systems involved and some cumbersome labour-related mechanisms. This article describes the main steps under Spanish law and some of the practical difficulties to carrying out cross-border mergers in Spain.

Overview: regulation and concept of intra-EU cross-border merger

Cross-border mergers are regulated by Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies, which was further restated and replaced by Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (Directive 2017/1132).

According to Directive 2017/1132, intra-EU cross-border mergers are those mergers where the companies involved are limited liability companies incorporated in accordance with the law of two or more states forming part of the EEA, whose registered offices, central administration or principal centre of activity are located within the EEA.

Phases of an intra-EU cross-border merger and guiding principles

Broadly speaking, and as with internal mergers, intra-EU cross-border mergers follow a mandatory process that takes several months to complete. However, in certain cases, such as absorption of wholly owned subsidiaries, some steps can be skipped or simplified, making the overall process less time consuming. Fortunately, this simplified merger process often applies to mergers implemented in the context of intragroup reorganisations, which is the context in which most intra-EU cross-border mergers happen.

Intra-EU cross-border mergers typically follow the steps outlined below.

Preparatory phase. Before starting the actual merger process, it is advisable for local counsel to prepare a step-by-step plan and timeline, as these are of the utmost importance to identify inconsistencies between the regulations applicable in each country and to allow the parties to agree on a merger process that works and addresses these inconsistencies.

Given that two or more timelines and processes are to run in parallel, one for each jurisdiction involved, where there are gaps between the applicable regulations, as is often the case, innovative solutions should be articulated to blend the timelines so that the merger can be effected properly in all relevant jurisdictions.

Furthermore, where adjustments to the standard merger process in each jurisdiction are required for the combined process to work, it is advisable to arrange preliminary meetings with the competent authority to ensure that they are comfortable with the proposed process.

Preliminary phase. This involves preparing and adopting the common draft merger terms, a directors’ report on the merger and an independent expert’s report on the merger, if applicable. The personal law of each merging company will govern the minimum legal content and bodies in charge of issuing these documents.

The common draft merger terms must cover at least the following items (where applicable): (i) share exchange rate and amount of any cash payment; (ii) advantages or special rights granted or attributed to the shareholders or experts who study the merger plan, as well as to the management, monitoring or control bodies of the merging companies; (iii) the date from which the shareholders will be entitled to participate in profits; (iv) the date for accounting purposes; (v) articles of association of the transferee company; (vi) information on the valuation of assets and liabilities and the date of the merger annual accounts; and (vii) information on the procedures by which any employee participation rights are to be determined. In Spain, the common draft merger terms are deposited with the relevant authority unless simplified procedures apply.

The directors’ reports on the merger are prepared by the management bodies of each merging company. These reports, typically the same report for all merging companies, justify the legal and economic grounds for the merger and the likely effect on employees, shareholders and creditors.

The personal law of each merging company may differ, albeit slightly, as to the required contents of the draft merger terms and directors’ reports on the merger. For instance, in some jurisdictions, the share exchange rate must always be set out in the merger terms while in other jurisdictions it is not necessary to do so in some cases, or the date of the merger for accounting purposes determined pursuant to the law of one jurisdiction may be inconsistent with the mandatory rules in another jurisdiction. Formal and timing requirements may also differ; for example, while compulsory in some jurisdictions, others do not require all directors to sign the common draft merger terms.

The parties must therefore accommodate the different requirements, typically to comply with the most restrictive or protective rules, although this is not possible in all cases and other ad hoc solutions, ideally agreed upon with the competent authorities, may have to be implemented.

Finally, an independent expert’s report, which is mandatory unless the simplified procedures apply, must cover both the exchange rate and the methods used for its calculation and the sufficiency of the resulting share capital increases.

Decision-making and interim phase. This is the phase where there are most differences between jurisdictions and careful planning is necessary to avoid bottlenecks.

For instance, in some jurisdictions, such as Spain, France and the Netherlands, no court or other public authority intervenes during the merger process, which is managed entirely by the merging entities, pursuant to a procedure, compliance with which is supervised, and confirmed by the relevant authority at the end of the process as a requirement for the merger to be valid.

In Spain, certain documentation must be made available to shareholders, employees and creditors during the merger process. The general meetings must approve the common terms of the merger by a specific majority and the merger must be announced in an official gazette and newspapers. Creditors may oppose the merger following its announcement.

Conversely, in other jurisdictions, such as the UK before Brexit and Ireland, one or more court hearings must be held to allow the court to supervise certain aspects of the merger process and give leave for it to continue, subject to certain waiting periods during which shareholders, employees and creditors are entitled to inspect the merger documents.

In practice, these differences may hinder the continuity of the merger process in the jurisdictions involved. In fact, often steps must be taken in one jurisdiction that are not legally required there but are helpful to comply with the requirements in the other jurisdictions involved, such as additional shareholder approvals of the merger.

Enforcement and registration phase. The last phase of the merger process generally involves the submission of the merger documents, which in some jurisdictions, such as Spain, must be notarised, to the competent authorities for each of them to verify that the legal requirements have been met, following which they will issue official certificates. The certificate issued by the competent authority of the transferor must be sent to the competent authority of the transferee so that the latter can confirm that the merger is fully effective. Further, the competent authority of the transferee then issues another certificate attesting that the transferor has been removed from its registries.

Conclusion

The EU regulations have allowed companies within the EEA to perform cross-border mergers that have enhanced the EU internal market. While a high degree of harmonisation has indeed been achieved, inconsistences between national regulations still exist. To overcome these inconsistencies, it is key for local counsel, often in conjunction with the competent authorities, to coordinate and plan the merger process thoroughly, to identify the issues before they arise and to implement creative and tailor-made solutions to solve them. Looking forward, it would be desirable for the EU authorities to continue working on implementing common and comprehensive regulations on cross-border mergers that remove the discrepancies between jurisdictions.

Gemma Rodergas Rey and Josep Moreno Vallés are associates at Uría Menéndez. Ms Rodergas can be contacted on +34 93 416 55 66 or by email: gemma.rodergas@uria.com. Mr Moreno can be contacted on +34 93 416 56 13 or by email: josep.moreno@uria.com.

Gemma Rodergas Rey and Josep Moreno Vallés

Uría Menéndez