Types of Merger
Consequences of Merger
Preconditions of Merger
Compensation of Dissenting Shareholders
Implications
The new Commercial Law took effect on January 1 2002 and replaces all legislation which previously regulated business activities, including the Law on Business Activity, the Law on Limited Liability Companies and the Law on Joint Stock Companies.
The Commercial Law specifies new preconditions for the reorganization of commercial companies which differ significantly from the previous regime. A company may be reorganized in three ways: by merger, division or restructuring.
Companies can be merged through (i) acquisition, where one company transfers all of its property to another company, and (ii) consolidation, where two or more companies transfer all of their property to a newly founded company.
The consequences of a merger are as follows:
- All property of the target company is transferred to the acquiror;
- All rights and obligations of the target company are transferred to the acquiror;
- Once acquired, the target company ceases to exist without any need for a liquidation procedure; and
- The shareholders or members of the target company become shareholders of the acquiror.
The Commercial Law sets out general provisions which are common for all types of mergers, and also includes special terms and conditions which apply to specific types of merger (eg, if one of the participating companies is a joint stock company).
The following measures must be taken in all merger transactions:
- The participating companies must enter into a merger agreement;
- A prospectus must be prepared which explains the legal and economic aspects of the merger, the terms of the agreement and other facts relating to the merger. The prospectus may be prepared jointly between the participants, or alternatively each company can prepare its own. In certain limited cases there is no need to prepare a prospectus;
- An auditor appointed by the Commercial Register Office must conduct an examination of the merger agreement and draft a report on its findings (except in cases where the companies can proceed without a prospectus);
- The shareholders meeting of each participating company must approve the merger decision and, if necessary, any amendments to the company's articles of association or the draft articles of association of the newly founded company;
- Provisions must be made for creditors' claims; and
- Each participating company must submit an application to the Commercial Register Office in order to have the merger registered.
Once all these steps have been taken, the Commercial Register Office will make the necessary entries regarding the merger in the Commercial Register. Only when all of these entries have been made is the merger considered completed.
Compensation of Dissenting Shareholders
For two months following the date on which the merger comes into effect, all target company shareholders who voted against the decision are entitled to request the acquiror to redeem their shares for money. The amount of compensation may not be less than the amount which the shareholder would have acquired if the target company were liquidated. If the dissenting shareholders do not exercise their right to request redemption of their shares, they may freely alienate their shares within the two-month period, irrespective of any restrictions on alienation provided for in the merger decision, the articles of association or by law.
As a result of the Commercial Law's entry into force, mergers must follow a more precise procedure than before. Under the previous laws, the measures that must be taken in order to implement a merger were left unregulated. The new law's provisions afford increased protection to the creditors and participants of the merger; for example, there is a mandatory obligation to secure creditors' claims, and dissenting shareholders have a right to redemption of their shares.
For further information on this topic please contact Filip Klavins at Klavins & Slaidins by telephone (+371 703 5222) or by fax (+371 703 5252) or by email ([email protected]).