New EU regulations governing the cross-border merger of companies became law in May.
The European Communities (Cross-Border Mergers) Regulations 2008 were signed into law on 27 May with immediate effect. The Regulations transpose into Irish law an EU directive relating to cross-border mergers of limited liability companies within the European Economic Area (EEA). The Regulations provide for a new pan-European procedure and will apply to a merger between Irish and non-Irish EEA private and public limited companies where the merger occurs by way of:
- merger by acquisition (where an existing company acquires all the assets and liabilities of another company),
- merger by absorption (where an existing company acquires all the assets and liabilities of its wholly-owned subsidiary), and
- merger by transformation (where the new company acquires the assets and liabilities of two or more existing companies).
In each case, the transferor companies dissolve automatically without going into liquidation. After completion, the applicable company law is the law in the state in which the surviving company resulting from the merger has its registered office. Where an Irish company or companies are involved, certain pre-merger criteria must be satisfied and an Irish company proposing to participate in any of the above types of merger must be able to merge under Irish domestic law. The main steps involved are as follows.
Common Draft Terms
Common draft terms must be drawn up in writing by all of the merging companies and adopted by the board of directors of each Irish merging company. The new Regulations provide that the common draft terms should include certain specific information about the merging companies and the proposed transaction and generally may also include any additional terms that are not inconsistent with the Regulations.
Directors' Explanatory Report
The Regulations provide that the board of directors of any Irish merging companies must draw up an explanatory report which is to be made available to the members of the company and the representatives of its employees or, where there are no representatives, to the employees themselves. This explanatory report should state the legal and economic grounds for the common draft terms and explain the implications of the cross-border merger for the company's members, creditors and employees.
Except for certain circumstances set out in the Regulations, an auditors' report may be required stating that the consideration for the transfer is reasonable.
Each Irish merging company is required to submit a notice along with a copy of the common draft terms to the Registrar of Companies, which the registrar will publish in the CRO Gazette and each company must separately publish a notice in two national daily newspapers. The common draft terms must be approved by the members of each Irish merging company not earlier than one month from the publication of the notice by the company and the Companies Registration Office.
Employee Participation Rights
One of the key aspects of the Regulations is the protection of employee participation rights. The Regulations require that where the employees in a transferor company have employee participation rights, these must be protected where the successor company is Irish and provision must be made for this. Employee participation is the practice of mandatory representation of the employees on the board of companies of a certain size and is an evolving trend in Europe and includes the right of employees to elect or object to a nomination to the board. While the concepts of employee information and consultation procedures are already a feature of Irish law, this country does not have any equivalent legislation for employee participation. The Regulations do not, however, create new rights where employee participation rights do not already exist but simply protect those which do exist in any one of the merging companies. The Regulations provide that the merging companies can either agree to negotiate a new agreement in relation to participation rights or alternatively they can adopt the default position of the standard rules (a standard criteria for the involvement of the employees).
As the transferor companies dissolve automatically in the case of a merger completed in accordance with the Regulations, a pre-merger reorganisation may be required in order to ensure that any assets and/or liabilities which are not intended to transfer are moved elsewhere. Tax-restructuring reliefs - for example, relief from stamp duty in relation to an inter-group transfer of assets under section 79 of the Stamp Duties Consolidation Act 1999 - should also be considered when structuring a merger. Due to the lack of familiarity with the concept of employee participation, it also remains to be seen as to whether the protection of participation rights under the Regulations will act as a deterrent for using the scheme where the surviving entity is an Irish company. In general, however, where this issue does not arise, the Regulations offer a useful new means of cross-border restructuring for Irish limited companies.