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Cross-Border Mergers and Cross-Border Takeovers Compared

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Book cover Cross-Border Mergers

Part of the book series: Studies in European Economic Law and Regulation ((SEELR,volume 17))

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Abstract

The EU rules on cross-border mergers provide a legal framework for the aggregation of firms across the borders of EU Member States (Directive (EU) 2017/1132). These rules are not alone in pursuing this aim, as the takeover bid directive (Directive 2004/25/EC) also contributes to fostering cross-border combinations of European firms. While grounded on comparable regulatory aims, the two set of rules display remarkable differences. These are only in part a direct consequence of the fact that, in cross-border mergers, previously separate companies become a single legal entity, while this is not the case with cross-border takeovers. This chapter offers a comparative analysis of some of these differences and explores their rationale and their consequences on investor protection. The analysis includes the board’s role, shareholder information and collective decision-making, as well as shareholder exit rights.

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Notes

  1. 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. 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. 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.

  4. 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. 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. 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. 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).

  8. 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. 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. 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. 11.

    For this reason, the law on corporate groups can be a partial substitute for the mandatory bid rule (Grundmann 2012, pp. 721–722).

  12. 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. 13.

    See infra Sect. 2.2 for further analysis.

  14. 14.

    See infra Sect. 2.3.2 for further analysis.

  15. 15.

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

  16. 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).

  17. 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. 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.

  19. 19.

    For the sake of simplicity, pre-bid measures are not considered in detail here.

  20. 20.

    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).

  21. 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).

  22. 22.

    Shareholders have the right to inspect the draft merger terms and their accompanying documents (Art. 97 Directive (EU) 2017/1132).

  23. 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. 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. 25.

    Namely 20% under the new regime (Article 1(5)(a) Regulation (EU) 2017/1129).

  26. 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.

  27. 27.

    Equivalence does not require that all the information mandated under the applicable prospectus schemes be given (see already CESR 2003).

  28. 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. 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. 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. 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).

  32. 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. 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. 34.

    See e.g. Italy (Article 39-II Consob Reg. No 11971/99).

  35. 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. 36.

    Most major EU jurisdictions have set more demanding requirements than the EU minimum thresholds: Kraakman et al. (2017), p. 184.

  37. 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. 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).

  39. 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)).

  40. 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. 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. 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).

  43. 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).

  44. 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).

  45. 45.

    See Sect. 1.1 above.

  46. 46.

    See Sect. 1.1 above.

  47. 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. 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. 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. 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.

  51. 51.

    The threshold is defined by reference to the squeeze-out rule.

  52. 52.

    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. 53.

    Conditional offers are particularly prone to pressure to tender: see text following fn 38 above.

  54. 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).

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  1. University of Utrecht, Utrecht, The Netherlands

    Matteo Gargantini

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  1. Department of Law, University of Cyprus, Nicosia, Cyprus

    Thomas Papadopoulos

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Gargantini, M. (2019). Cross-Border Mergers and Cross-Border Takeovers Compared. In: Papadopoulos, T. (eds) Cross-Border Mergers. Studies in European Economic Law and Regulation, vol 17. Springer, Cham. https://doi.org/10.1007/978-3-030-22753-1_7

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