Until recently Section 1 of the law regulating the transformation of companies (Umwandlungsgesetz, Transformation Act) prevented German companies from merging with foreign companies. It expressly provided that a German company could only take part in transformations (such as mergers, splits, change of legal forms and transfers of all assets) with another German company. However, the European Directive 2005/56/EC of October 26, 2005 (Merger Directive), and the European Court of Justice’s SEVIC decision have changed the legal landscape at least with respect to mergers. On August 9, 2006, the German government resolved to implement the amendments (German Transformation Amendments), which are necessary under the European Directive, to the Transformation Act. The amendments must still be enacted by the German lawmakers, which is expected to occur in the first quarter of 2007.

Cross-Border Transformations

The Merger Directive and the German Transformation Amendments cover cross-border mergers of corporate entities (limited liability companies and corporations) that have been established under the laws of a Member State and whose headquarters are in a Member State, provided that the merging companies are subject to at least two European jurisdictions.

The German Transformation Amendments reach further than the Merger-Directive; they cover the cross-border mergers involving companies that are subject to the laws of Iceland, Liechtenstein and Norway (the members of the European Economic Area). Whether the non-German entity may take part in a cross-border merger with a German corporate entity is also a matter of the laws of the country in which the non-German entity is headquartered. In a cross-border merger, both the German and the foreign legal requirements have to be met.

However, the Merger Directive and the German Transformation Amendments do not provide for a legal framework for cross-border splits or changes of legal forms. They do not cover the merger of partnerships, and they do not regulate the tax consequences of a cross-border merger. However, it is anticipated that an older merger tax directive will also be implemented soon.

The SEVIC Decision

The guidelines of the SEVIC decision fill the gaps in the Merger Directive and the German Transformation Amendments. In the SEVIC matter, the European Court of Justice had to decide whether or not a Luxemburg company could be merged into a German company. The SEVIC court ruled that Section 1 of the Transformation Act, which allows only German mergers, was not in line with the right of European persons to freely choose their domicile (freedom of settlement). As the SEVIC court did not differentiate between corporate entities and partnerships, it is widely held that SEVIC also allows for the cross-border merger of business partnerships (provided that the applicable foreign laws do not prohibit such merger).

Civil Partnerships

German law prohibits the merger of German civil partnerships (not involving a business) as well as cross-border mergers involving foreign civil partnerships. For all partnerships German law provides a straightforward work-around: If all but one member of the partnership cease to be a partner, then all the assets and liabilities of the German partnership are automatically transferred by operation of law (Anwachsung) to the remaining partner. This concept also applies if the remaining sole “partner” is a foreign partner; thus in such cases the German partnership will have effectively “merged” with its foreign sole partner, who will then become successor to the German partnership.

Even though the SEVIC court expressly ruled only on the merger of a foreign company into a German company, it is the more current (but disputed) view that the same must apply vice versa (thus allowing the merger of a German company into a foreign company). The SEVIC court did not, however, rule on cross-border splits or changes to the legal form. Whether those transformations are now possible under German law remains unclear and under dispute.