Apr 03

Cross Border Merger

Globalization, the enlargement of EU, the increasing need to encourage cooperation between companies of different Member States and to adjust to nowadays standards, let the EU Council to adopt Directive 2005/56/EC in September 2005 on Cross-Border Merger to create a stable ground monitoring the EU territory.

Commission’s first attempt to adopt a proposal, in December 1984, was rejected by the Parliament as companies could take advantage of the different worker system of each Member States and cause loss or reduction to employee participation. Τhe present Directive overcame this obstacle by placing a special negotiating body to ensure that the employee participation complies with the model of the European Company Statute. In case of failure, the standard rules of employee involvement will come into play.

The EU Directive covers all limited liability companies with share capital in EU; companies that have legal personality and separate assets which alone can be used for the company’s debts, except undertakings for collective investment in transferable securities. It requires the companies involved to be formed according to the national law of a Member State, their registered office, central administration or principal place of business must be within the Community and at least two of those companies are controlled by the law of different Member States.

Additionally, the Cross-Border Merger takes place when:

  1. a parent company absorbs its wholly owned subsidiary company which is to be dissolved without going into liquidation and all of its assets and liabilities are transferred to the first-mentioned company, or
  2. a company acquires all the assets and liabilities of another company with or without a cash payment, or
  3. a new corporate entity is formed into which two existing entities can move; is when two or more companies which are to be dissolved without going into liquidation, transfer all their assets and liabilities to a new company and their members acquire the securities or shares representing the capital of the new company, with or without a cash payment.

The result of a Cross-Border Merger is that once a new entity is formed, then the companies involved in the merger cease to exist, all their assets and liabilities are transferred to the new entity and their members become the members of the new entity. The control of the new company falls under the national legislation of the Member State where its registered office is situated and therefore it has the responsibility to perform all the formalities required by that legislation.

The Directive was drafted in such a way as to make the procedure easier, faster and less costly. Most importantly, it guarantees the legal certainty of the parties involved and made this option available to a greater scale of companies rather than before, specifically, to small and medium sized companies who wish to expand their business in more than one Member State without the need to form a European Company.

The Directive, having created a harmonized platform for mergers within EU, employment levels will rise, the setting up complex networks of subsidiaries is avoided and the companies’ activities will be internationalized, resulting in an increased investment and cash flow along the territory of EU. Internal Market Commissioner Frits Bolkestein stated that it will “facilitate cooperation and restructuring necessary to make Europe more competitive”. In addition, it prevents the winding up of the acquired company and the creation of new companies saving time and money.

Cyprus Law:

In Cyprus the existing Companies Law, Cap 113 was amended in 2007 by adopting N.186(I)/2007 (‘the Law’) in order to bring it in line with the EU Directive. According to the Law, any company may take part in a Cross-Border Merger, except those with limited liability by guarantee and those which are under dissolution.

Why choose Cyprus to initiate a Cross-Border Merger?

The essential characteristic of the EU Directive is that the Cross-Border Merger procedure is monitored exclusively by the national applicable principles and rules of the Member State where the new company will emerge and which the companies involved are already familiar with. With this respect, Cyprus may be considered to be one of the best available options to initiate a Cross-Border Merger as the companies involve will enjoy the following:

  • rip off the benefits of reduced administrative costs;
  • the speedy and easy national applicable procedures;
  • investors buying property in Cyprus pay reduced VAT 5%;
  • tax efficiency; the tax regarding dividends, in Cyprus is only 10%, the lowest standard rate in the EU;
  • trading securities are exempt, no withholding tax in Cyprus;
  • the growth of energy sector and public infrastructure projects will stimulate increase cash flow and investment in the Cyprus market;
  • Cyprus offers a solid legal system;
  • Cyprus situated between Asia, Africa and Europe motivates new trading possibilities for companies.

 In a nutshell the Procedure in Cyprus is as follows:

  1. The directors must draft and approve the proposed terms of the merger, be filed with the Registrar of Companies and be published one month before a general meeting is called.
  2. Then, a general meeting will be called where the members of the Company are called to approve the merger plan.
  3. Once approved, the next step is that the company must obtain a Court Certificate via a court application stating that the pre-merger acts and formalities have taken place and are satisfied (‘1st Court Order’ ).
  4. A similar pre-merger certificate must be obtained by each merging non-Cypriot company in its own jurisdiction;
  5. Within 6 months of the issue of the 1st Court Order, a second Court Certificate must be obtained by which the Court will approve the legality of the completion of the merger, i.e. whether the merging companies approved the common cross border merger plan under the same conditions, and if the methods of participation of the employees in relation to each merging Cyprus Company have been followed in accordance to s.201W of the Law and in accordance to national legislation for every merging non-Cypriot company, and set a date on which the Cross-Border Merger shall be deemed to take effect (‘2nd Court Order’).
 michael kors handtasche