The Implementation of the Cross-Border Mergers Directive (2005/56/EC) in Germany: A Story of Insufficiencies and (Better) Alternatives

Abstract

The implementation of the 10th European Company Law Directive (Cross-Border Mergers Directive (2005/56/EC)) in the German Law Regulating Transformations of Companies (Umwandlungsgesetz [UmwG]) in 2007 provided for the first time a legal framework for cross-border mergers of corporations in Germany. However, these provisions are hardly used in practice and are generally considered as a failure. After analyzing the reasons for this limited use of cross-border mergers in Germany the paper analyses various aspects of the respective provisions dealing especially with the rather broad and extensive rules on the protection of minority shareholders and the rules on creditor protection. Afterwards the paper shows alternatives to cross-border mergers reflecting especially the discussion in Germany on the impact of the Sevic-, Cartesio and VALE-cases of the ECJ.

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).

Annex (English Translation of §§ 122a ff. German Transformation Act)

1.1 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.

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.

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.

• (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 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 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.