Corina Roman, Managing Associate with SIMION & BACIU’s Corporate, M&A practice group, authored an extensive overview on the core aspects that define a successful implementation of a cross-border merger project, taking into account the recent amendments brought to the relevant legislation. Below her expert view, prepared for and first published by avocatnet.ro platform.
5 key take-aways on the cross-border merger emerging from the recent legal amendments:
- EU member states or states part of the European Free Trade Association (EFTA) may benefit from clearer options for relocating their activity;
- For a successful cross-border merger, it is essential for the merging companies to make a preliminary analysis of the legal requirements existing in the departure state and in the destination state;
- The common merger project will be the bible of the entire process and must “constitute common ground” between the legislations of the states involved in the merger;
- Employees, shareholders and creditors must be duly informed, benefiting from a more clearly regulation protection;
- The Commercial Register representatives are now endowed with new powers and can delay the entire merger process if they identify serious clues of a potential illegal purpose of the operation.
The concept of cross-border mergers is a response to the interest of private companies in relocating their operations in EU or EFTA member states, which offers (enhanced) opportunities from a labor and commercial perspective without going through a dissolution and liquidation process that could trigger unwanted legal and tax implications. However, for this concept to become feasible, it was necessary to create at European level a unitary framework for cross-border mergers, including by making available the instruments required for companies to actually access this type of cross-border operations under extended visibility and predictability conditions.
A first attempt in this direction was made in 2005, along with the passing of the Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies, but the actual moment of having this process turn into reality only came in 2019, when Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions was adopted.
As regards Romania’s stand in the big picture, it has to be noted that the Romanian lawmaker adopted Law 222/2023 amending and supplementing Companies’ Law no. 31/1990, as well as Law no. 265/2022 on the commercial register and amending and supplementing other normative acts with applicability on the registrations made in the commercial register, which transposes the legal framework for cross-border mergers, spin-offs and conversions into national law.
Strictly referring to cross-border mergers, a first reading of the new law will reveal an attempt for a simplification of the procedures that the companies involved in such an operation must undertake and an attempt to enhance the legal safety of deeds adopted in such context. Hence, in line with the most recent tendencies, the Commercial Registers will communicate between themselves using the interconnection system, already in place at EU level. At the same time, the information that needs to be obtained by the Romanian Commercial Register representative in order to conduct the preliminary check of the merger (such as, the tax certificate, information from the criminal record, information from the national integrated IT system monitoring receivables resulting from criminal offences – ROARMIS, etc.) will be directly requested by such representatives from the Romanian competent authorities.
Cross-border merger or a Procrustean bed for merging companies
Formally, the cross-border merger is a process involving not only companies, but also different legal systems, which is why the companies initiating such a process should take into consideration that they will deal with two or more applicable legislations, even if on different segments of the process. Hence, the Romanian law will apply to aspects related to:
- preliminary check – when Romania acts as departure state for the merging companies, in relation to the issuance of the pre-merger certificate;
- control of the aspects concerning the incorporation of the new absorbing company under the Romanian law or registration of the changes in the pre-existing absorbing company operating under the Romanian law, being also applicable over the effective date – when Romania acts as destination state.
Preliminary check of the companies’ activity and applicable legislations
Consequently, a first step that must be taken by the merging companies is to review the applicable legal provisions, namely the legal frameworks applicable in the state of departure and in the destination state, so as to ensure that the involved companies will not face difficulties or restrictions in the implementation of the merger in either of the EU member states concerned.
Hence, the consultants of the merging companies must provide the management and shareholders with a pre-implementation report consisting in an analysis similar to that prepared in due diligence processes conducted in the context of transactions. This analysis made by legal and tax consultants will inform the management of the companies involved, even before the common merger project is drafted, about the key aspects to regulate/remedy/consider during the merger, including from the perspective of employees, secondary offices to be taken over/be closed, authorizations or permits to be transferred, if possible, potential obligations to notify competent authorities before and/or after the implementation of the merger and other related aspects, obligations to request the approval of or organize changes connected to the merging companies’ business partners, as well as effects to be reflected at tax and accounting level (an aspect which should not be neglected since the failure to conform may trigger serious implications).
The common merger project or the bible of the cross-border merger
The key element of a cross-border merger is the common merger project, which will be the bible of the entire operation and which will rely on the above-mentioned pre-implementation report. In addition to the usual aspects of a merger project (such as, used valuation method, exchange ratio, effective date, changes in the share capital of the absorbing company, amendment/preservation of management bodies, amendment/preservation of secondary offices, taking over immovable/movable assets, authorizations, know-how, amendment/preservation of legal form, etc.), the common merger project must also include details on the implications of the merger on the labor force, procedures by means of which employees will participate in the absorbing company, and guarantees provided to creditors.
An element of pure novelty in terms of explicit regulation, which was already implemented in practice, is that the underlying financial statements will also constitute an appendix to the merger project together with the articles of association of the absorbing company to be incorporated, respectively with the draft deed amending the articles of association of the absorbing company.
However, a matter which we expect to pose difficulties in practice, and which must be highlighted to companies assessing the potential implementation of a cross-border merger, is that the financial statements used for the preparation of the common merger project cannot be older than 6 months as at the date of the common merger project. From our experience, large companies, who usually have the resources required to undergo such cross-border operations, will have the pressure of a very tight timeline, which is to be carefully considered and confirmed with all key stakeholders, since the auditing of complex financial statements also requires the allocation of resources dedicated to answering auditors’ requests, as well as an extra budget for contracting such auditors. Also, in terms of timeline, it should be mentioned that the mandatory convening periods for the general meeting of shareholders deciding on the merger will also add to the merger timeline.
A first preliminary filter – informing shareholders and employees
The new legal framework maintains the obligation of the merging companies’ management to inform shareholders and employees, but also sets forth more detailed rules on how such information must be performed. The companies’ management is to make available to employees and shareholders either two separate reports, either one single report with two sections (one for shareholders and one for employees), where the management explains and provides justification for the legal and economic grounds of the merger, while laying out also the key implications of the merger on how the activity will be conducted in the future. This report must also take into consideration that it has to include the types of aspects deemed mandatory by the law for each category of informed persons, being essential that such information is performed in a clear and concise manner, while keeping confidential the sensitive information relating to the business of the merging companies.
The section/report for the shareholders is not required in case of limited liability companies with a single shareholder or if all shareholders waive such obligation (being a protective measure set forth for the benefit of shareholders), while the section/report on employees is not mandatory in case the business of the merging companies is exclusively carried out by directors or members of the board of directors/supervisory board or of the management board (the information not being required since they are the ones preparing the common merger project).
A second filter – expertise report of an independent expert
A second preliminary filter on the compliance side of the merger process is the expertise report prepared by an independent expert, which is meant to verify the common merger project in terms of price of shares in merging companies, while taking into account the market price of such shares, the share exchange rate and the method used for determining the price of shares.
Although in practice such reports have been drafted so far mostly by experts members of the Body of Expert and Licensed Accountants of Romania (CECCAR), Law 222/2023 now lays down an obligation for such experts to be certified valuers, members of National Association of Authorised Romanian Valuers (ANEVAR). What drew our attention is that, in the case of cross-border mergers, the exchange ratio is influenced also by the value of companies located abroad. This is why a real check of the common merger project also entails the valuation of companies located abroad, which might trigger either delays or pose difficulties in obtaining a report of an independent expert on the common merger project. Moreover, if the companies opt to for the global valuation method, then the expert reviewing the common merger project will have to be different from the one performing the global valuation of companies, so as not to place himself/herself in position of a conflict of interest by reviewing his/her own work. Depending on the conclusions drawn in the expertise report, the merging companies may have the obligation to amend the merger project.
Free of the burden to obtain such a report are, however, limited liability companies and the companies where the shareholders of all merging companies reached a consensus to waive the drafting of such a report.
Publication of the common merger project, a greater interest for the online
To ensure the information of all stakeholders of a cross-border merger, the law requires the publication of the common merger project. Similar to domestic mergers and in line with the recommendations for online proceedings included in the Directive 2121/2019, involved companies have the option to publish the common merger project on their own websites, which may allow for a reduction in the time spent with the publication. If the option is for publication on own websites, it is mandatory to ensure the technical conditions required for a continuous and uninterrupted publication, free of charge of the common merger project and related documents, for a period of at least one month prior to the date of the general meeting of shareholders; in this case, companies will be required to prove compliance with such requirements (the methods used in domestic mergers may also be applied in such cases). Depending on the option made, the entire merger project or just a document summarizing the common merger project will be also published in the Official Bulletin of the Commercial Register.
Approval of the common merger project of the cross-border merger – longer convening periods for general meetings of shareholders
An aspect of novelty in comparison to the previous version of Companies Law 31/1990 consists in the minimum period for convening the general meetings of shareholders approving the cross-border merger, which cannot be shorter than 6 weeks by contrast to the minimum period of 30 days provided by the Romanian law for joint stock companies, and respectively 10 days for limited liability companies.
Once convened in compliance with those above, the general meetings of shareholders of the merging companies will decide on the entire merger process, while also taking into account the feedback received from employees and the information report made available by the management.
Enhanced protection for creditors and shareholders
Furthermore, the new law ensures an enhanced protection of creditors and shareholders who wish to exercise their right of withdrawal. In what concerns the right of withdrawal of shareholders, the new provisions require the shareholder to act in good faith, by announcing the intention to withdraw no later than during the general meeting of shareholders deciding on the approval of the cross-border merger. In this way, the company affected by the withdrawal may fulfil its obligations to notify creditors with receivables existing before the merger project date, about such withdrawal.
Without going into details about the periods for the exercise of the withdrawal rights or the due pecuniary compensation, it is important to mention that if Romania is the state of departure, the shareholders may challenge in court the price payable for the shares held in the context of their withdrawal. An enhanced protection is also granted to shareholders that choose not to withdraw but who disagree with the exchange ratio, as they may seek compensation as remedy.
Creditors with receivables not due and preexisting at the common merger project date may request the merging companies to provide proper guarantees if they disagree with the guarantees already included in the common merger project. However, the request of guarantees cannot be unreasonable since they have to allow the merger to produce effects. It is important to point out that the proper nature of the guarantees provided affects the obtaining of the pre-merger certificate.
New powers for the Commercial Register representatives with respect to suspicions raised by a potential illegal purpose of the cross-border merger
Considering the new obligation of Commercial Register representatives to send to court for review the applications for the issuance of a pre-merger certificate whenever they have serious doubts with respect to a potential illegal purpose of the operation, we are asking ourselves whether the personnel of the Commercial Register has attended or is scheduled to attend trainings on the identification of matters entailing a high risk of illegal purpose. Domestic mergers are processes which involve a basket of resources and experts, while cross-border mergers may easily be qualified as their more “exotic” sisters. Bearing this in mind, in order for these new legal provisions to produce the intended effects in a proper manner, we believe that it is a must to ensure that the Commercial Register representatives have access to the proper means to carry out their activity.
Also, let’s keep in mind that a cross-border merger has a specific timeline, which involves not only the merging companies, but also their business partners, agreements in force, strategical aspects, commercial advantages to be capitalized within specific timeframes, and the obtaining of required financing. Hence, any delay along the road of such a complex process may prove very pricey for the merging companies.
Moreover, it is worth mentioning that, once the legality check of the cross-border merger is conducted, in order to ensure the legal safety of such complex operations, the law provides that the cross-border merger cannot be, in principle, cancelled after the effective date. As such, if an action for cancellation is filed, such action cannot be successful if it only relies on irregularities concerning the exchange ratio, price of the shares in case of withdrawal from the merging company or failure to comply with the obligations to inform the shareholders on the price of shares. In order to avoid those cases in which the lawfulness of the merger effects is being questioned, the lawmaker allowed the merging companies to remedy the irregularities within a period set by the court.
As to the criminal side of cross-border mergers, the merging companies should also bear in mind that, once the merger is completed, the criminal liability and the consequences of such will be taken over by the pre-existing or newly incorporated absorbing company, which might cause reputational damages, loss or limitation of the number of investors, disqualification from certain public tenders or impossibility to attract further financing from banks.
Further regulations are needed in order to ensure a correct application of the new legal framework
For cross-border mergers to become a viable option, companies must benefit from more clarity on the key elements which are part of this process. This can be first obtained by issuing implementation norms for Law 222/2023 and Law 265/2022, the amendments implemented during the last period being significant.
Also, the current legal framework concerning authorizations, employees and the accounting and tax matters must be updated in order to facilitate the implementation of such complex operations. In the absence of clarifying norms and of a legal framework adapted to the new reality, the cross-border merger concept will remain just an exotic type of mergers, hard to approach and more theoretical than practical.
Last but not least, when preparing the new legal framework, it would be useful to initiate timely public consultations on the legal amendments envisaged so as to actually allow the private sector and experts involved in such operations to contribute to the creation of a framework that is more attractive to those investors that have plans to relocate their operations in Romania. Despite the geopolitical difficulties and insecurity on other relevant levels, Romania remains a country with a lot of potential for investors.
Details about SIMION & BACIU’s Corporate, Mergers & Acquisitions practice are available HERE.