The authors of this Note are scholars of private international law and company law, respectively, as well as practitioners with experience in corporate restructurings. Back in 2007, upon request of the International and European Affairs Commission of the Italian Consiglio Nazionale del Notariato [3] they drafted a bill for the implementation in Italy of Directive No. 2005/56/EC on cross-border mergers of limited liability companies (the X Directive). The bill was transmitted to the Italian Government, who heavily relied on it when drafting Legislative Decree 30 May 2008, No. 108 [4] (the Implementation Decree), and is currently considered a valid tool for the interpretation of such statute [5].

When carrying out their work, the authors detected various critical issues, which result from the content of the X Directive and/or from its interplay with other rules of EU or domestic law. They tried to address some of them through ad hoc provisions, most of which were then incorporated in the Implementation Decree. The effectiveness of these provisions, however, largely depends on how such issues are dealt with in the other foreign State (or States) the laws of which become relevant in a given cross-border merger transaction.

This confirms the need for improvements of the current EU regulation of cross-border mergers.

Whether such improvements have to take place by keeping the “minimal harmonization” approach which to a large extent inspires the X Directive or by enacting uniform rules of EU company law is a policy decision.

The authors of this Note believe that the “minimal harmonization” approach, which the EU institutions have followed in the regulation of many other issues of company and business law, is the one to be favoured. Indeed, it appears more in line with the EU constitutional principles of subsidiarity and proportionality, as well as more consistent with the case-law of the European Court of Justice on corporate mobility [6] and with the “European market for corporate models” that it purports to establish.

Purpose of this Note is to very briefly outline the abovementioned critical issues stemming from the X Directive and to inform the European Commission about the way they have been dealt with in the Implementation Decree. The authors believe that similar solutions could be adopted at a EU-wide level in order to achieve a better coordination among the legal systems of the Member States in this area.

The authors have dealt more in detail with the matter of cross-border mergers and divisions in various publications [7]. They are in any event available to provide clarifications to the European Commission and to its group of experts or to discuss this Note in the context of the ongoing Consultation, should the need arise.

SOMMARIO:

Note on Cross-Border Mergers and Divisions within the EU in the Context of the Consulta­­t­ion Launched by the European Commission - A. Scope of the EU regulation of cross-border mergers - B. Right to implement a cross-border merger - C. Allocation of regulatory competences between the Member States - D. Allocation of jurisdiction between the Member States - E. Divisions - F. Specific issues - NOTE

Note on Cross-Border Mergers and Divisions within the EU in the Context of the Consulta­­t­ion Launched by the European Commission

A. Scope of the EU regulation of cross-border mergers

The X Directive deals only with cross-border mergers between limited liability companies which (i) are formed in accordance with the law of a Member State, and (ii) have their registered office, central administration or principal place of business within the Community, provided that (iii) at least two of them are governed by the laws of different Member States. As a result, the regime set out by the X Directive does not apply to cross-border mergers which involve: a)  companies or firms which are not set up in the form of a limited liability company (e.g, parterships, Gesellschaften buergerlichen Rechts, società di persone) but which are nevertheless beneficiaries of the freedom of establishment under art. 54 TFEU; b)  European Companies set-up pursuant to Reg. No. 2157/2001 and European Cooperative Societies set-up pursuant to Reg. No. 1453/2003; c)  companies formed in accordance with the law of one and the same Member State when the merger project envisages that the new company resulting from their merger shall be incorporated under the law of a different Member State; d)  companies or firms which are not beneficiaries of the freedom of establishment under art. 54 TFEU because any of the relevant criteria of applicability is missing. Since the X Directive works in the sense of facilitating the implementation of cross-border mergers by providing for a clearer and more effective regime, the non availability of such regime to transactions falling within abovementioned limits may be at odds with rules of “higher law” both of the EU and of the relevant Member States. In particular, the limits sub (a), (b) and (c) may conflict with art. 49 TFUE, as interpreted by the European Court of Justice in Sevic, where it has been held that cross-border mergers are one of the modalities through which companies may exercise their freedom of establishment, while the limit sub (d) may result into a “reverse discrimination” in breach of the equality of treatment principle enshrined in national constitutions [8] or in treaties on human rights [9]. The Implementation Decree has tried to address these issues by extending the application of its rules, in total or in part, and sometimes under condition of reciprocity, to those cross-border mergers transactions excluded by the scope of the X Directive since falling within the categories sub (a) and (d). Consistently with the European Court of Justice [continua ..]

B. Right to implement a cross-border merger

The X Directive indicates as a condition for a cross-border merger that transactions of that kind are possible only between “type of companies which may merge under the national law of the relevant Member State” (art. 4(1)(a)). This formula is ambiguous to the extent that it could be extensively interpreted to mean also that a Member State is entitled to provide that companies incorporated under its laws cannot a priori merge with foreign companies. Such interpretation would be plainly at odds with the fundamental right to corporate mobility which the European Court of Justice draws from the freedom of establishment, and in particular with its judgment in the case Sevic which has clarified that corporate mobility can also take place through the instrument of cross-border mergers. The authors of this Note had suggested in their bill that the abovementioned provision of the X Directive should have been clarified to mean only that a Member State is entitled to set-up a model of corporate organization to which domestic mergers are precluded, so that companies incorporated under that model would then be precluded also to implement cross-border mergers (this would not be in breach of art. 49 TFUE since the discrimination factor, which was sanctioned in the Sevic judgment, would be missing). The Implementation Decree, however, did not take up such suggestion. More in general, one may wonder whether the X Directive should not positively state a general principal of favor fusionis, based on art. 49 TFUE, so that in the event the law of one Member State would prohibit, or make de facto impossible, a cross-border merger which the law of the other relevant Member State would to the contrary allow, then the regulation set out by the latter should prevail.

C. Allocation of regulatory competences between the Member States

One of the main hurdles that entrepreneurs face when deciding whether or not to proceed with a cross-border merger project is the identification of the applicable legal regime. Of course, since cross-border mergers involve two (or more) companies incorporated under the laws of different States it is obvious that all such laws may, in principle, apply. The real problem, however, is to understand which specific item of the merger procedure and effects such laws do regulate and how to solve the conflict which may arise when two (or more) laws govern the same matter with different provisions. This is a typical private international law problem, enhanced by the fact that in most legal systems a detailed regulation of mergers can be found in statutes which have been originally conceived to cover domestic mergers only. The solution of this problem is essential to ensure legal certainty and foreseeability to the market operators. It could take place by enacting an ad hoc detailed regulation for cross border mergers (i.e., through “material private international law rules”), or by allocating the relevant States’ regulatory competence by way of conflict-of-laws rules, or by a combination of both. The X Directive follows the latter approach, but leaves a wide margin of autonomy to the Member States with respect to very important matters such as the decision-making process for the approval of the merger, the exchange ratio, the publicity formalities, the effective date, the protections granted to minority shareholders, creditors, employees and other stakeholders, the employees participation, etc. As a result, the X Directive needs to define the boundaries of the laws potentially applicable in any given transaction. It does so by referring to the “provisions and formalities” of the merger, with respect to which each participating company is to comply with its own law of incorporation (cf. Recital 3 and arts. 4(1), 4(2), 10(3), 13), and to the “company resulting from the merger”, whose law of incorporation has to be applied to regulate certain issues relating to the implementation of the transaction (cf. Recital 7 and arts. 11, 12, 16). This classification is helpful, but is not conclusive for the solution of conflict-of-laws issues since (i) there are aspect of the merger procedure which could well be characterized as pertaining either to the “formalities” or to the “implementation” of the merger [continua ..]

D. Allocation of jurisdiction between the Member States

Consistently with what already provided by the company law of various Member States, the X Directive requires each Member State to designate a national authority whose task is to certify the legality of the merger procedure. The relevant powers are then allocated by charging the authority of the Member State of incorporation of each participating company with the monitoring of the legality of the decision-making process of such company and the authority of the Member State of incorporation of the company resulting from the merger with the monitoring of the legality of the merger completion. Theoretically, it could be conceived that the authority of one Member State may challenge the findings (be they positive or negative) of the authority of another Member State. However, this would be at odds with the rationale of the X Directive and with the method that the EU legislator has quite likely followed in the coordination of the legal systems of the Member States in the area of cross-border mergers. Not by chance the X Directive states that the certificate issued by a national authority is “conclusive” (art. 10(2)). For this reason the Implementing Decree has clarified that a cross-border merger carried out in compliance with its provision is a priori valid and effective for the purposes of the provision of Italian private international law [10] which requires that the transaction be carried out by respecting the laws of all the States involved. For the same reason art. 24(2) of Reg. No. 1215/2012 Brussels I bis, providing for the exclusive jurisdiction of the courts of the Member State of incorporation with respect to certain types of company law disputes, should be extended to cover disputes arisen in connection with the merger, even when not relating to the validity of corporate resolutions (e.g., disputes relating to the issuance of the pre-merger certificate, to the scrutiny of the exchange ratio, to the protection of the interests of creditors, etc. affected by the merger).

E. Divisions

The Implementing Decree did not regulate divisions for the simple reason that this was out of the scope of the powers that the Italian Parliament had delegated to the Government for the purpose of implementing the X Directive. When drafting the abovementioned bill and transmitting it to the Government, the authors of this Note stressed that there were no reason not to enact similar rules aimed to facilitate the implementation of cross-border divisions, given the similarity of these two types of corporate transactions. Scholars in Italy agree that cross-border divisions are, in principle, possible and that they have to be regulated by applying by analogy the rules on cross-border mergers. Indeed, some cross-border divisions involving Italian companies have already been implemented.

F. Specific issues

The X Directive fails to address certain issues that the practice shows have arisen in the context of cross-border mergers. The law of various Member States contemplates the execution of a Deed of merger, or similar contractual arrangement, between the participating companies. Should this step not be required by the law of incorporation of the company resulting from the merger it could be argued that the same can be disposed of in the context of a cross-border merger transaction. Such a construction, however, would run counter to the important function that the Deed of merger accomplishes in the legal systems which provide for it, but would not bring any additional benefit to the policies pursued by the law of incorporation of the company resulting from the merger which may not contemplate the Deed of merger simply because of the different legal culture/legal tradition of the relevant Member State. It is for this reason that the Implementing Decree clarifies that in cross-border mergers involving companies incorporated under Italian law the Deed of merger is required even when the law of the company resulting from the merger does not provide for it. In such a case the Deed of merger has to be executed by way of a public deed by an Italian notary public. This, however, gives rise to some coordination problems with respect to the issuance of the pre-merger certificates. Contrary to what happens in the company law of various Member States, the X Directive does not set out specific rules for the regulation of mergers in the context of “leveraged buy-out” transactions. This may open the question of whether such rules apply to the target company, to the bidder company or to both. The Implementing Decree clarifies that the relevant provision of Italian law does not apply when the target company is incorporated under a foreign law.

NOTE