Reviewing Cross-border Mergers at EU Level

This blog post reviews the implementation of the Cross-border Mergers Directive (the ‘CBMD’)[1] and contemplates on future perspectives. It is based on a chapter published recently in an edited book scrutinizing EU perspectives and national experiences on the harmonization of cross-border mergers at EU level. This chapter discusses various studies and reports examining the implementation of the CBMD (see here, here and here) and seeks to identify its advantages and disadvantages, as revealed by CBMD implementation choices.

With regard to the main benefits of the CBMD, this directive completely transformed the M&A landscape at EU level. There is now a consolidated set of harmonized rules, which facilitate cross-border M&A activity in the internal market. Before the adoption of the CBMD, there was no harmonized framework for cross-border mergers. The general benefits of the CBMD as identified by the Bech-Bruun Study, a detailed and in-depth study scrutinizing comprehensively the implementation of the CBMD into all EU Member States and reaching some original findings, are the following: opening the internal market, procedural simplification and reducing organizational, operational, regulatory and agency costs. In addition, the Bech-Bruun Study identifies the following specific benefits of the directive: harmonization of conflicting laws, overcoming stalemates caused by shareholder unanimity requirements, enhancing protection for creditors and minority shareholders, efficiency gains through group reorganization, special advantages for the banking sector, facilitating cross-border company seat transfers, new tax-planning opportunities through the directive and cutting through red tape. The same study further identifies the following drivers of cross-border mergers: synergies and business strategy, reducing organizational costs, minimizing costs of regulatory compliance, tax planning and business-friendly regulatory environment.

With regard to the deficiencies of the CBMD, the Bech-Bruun Study identified various categories of obstacles and barriers: under-harmonization of rules, absence of clear standards on inter-agency communications, a need for a ‘fast track’ procedure, obstacles pertaining to safeguards for stakeholders and complexities with creditor protection. The Bech-Bruun Study also specified gaps and potential inconsistencies of the directive and discussed various trends and developments.

An article-by-article analysis of the directive reveals certain problems and deficiencies. Certain problems of the CBMD are related to the scope, the conditions relating to cross-border mergers, the available company types and the cash payment. Moreover, the protection of stakeholders (minority shareholders, creditors and employees) raises numerous issues. Various other problems derive from the procedure, which must be followed, for the completion of a cross-border merger. Two other intriguing aspects of the harmonization of cross-border mergers at EU level are spillover effects on other areas outside the CBMD and cross-border seat transfers through cross-border mergers. Additionally, the CBMD is a company law instrument with close links to other areas of law, such as capital markets law, financial law, competition law, employment law, civil procedure and tax law. A wider approach towards cross-border mergers by examining this company law directive in the framework of other areas of law is necessary in order to understand better and more comprehensively the business environment for cross-border M&A at EU level.

In April 2018, the European Commission issued a Proposal for a Directive amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions (the ‘Proposal’), which puts forth certain amendments to the CBMD. The legislative process for this proposed directive has advanced significantly and is almost completed—its formal adoption and publication is a matter of time. Regarding cross-border mergers, the most important amendments concern the scope, disclosure, the provision of exit rights to minority shareholders objecting to the cross-border merger (appraisal rights), the possibility to challenge the share-exchange ratio and enhancement of creditor and employee protection. The proposed amendments seek to clarify obscure points, simplify complex issues, strengthen and modernize disclosures, expand the protective scope of the current legal regime in relation to shareholders and creditors and strengthen protection of employees.

More than 14 years have passed since the adoption of the CBMD on 26 October 2005. This period of time allows us to critically evaluate the effects of the CBMD and to assess the experiences from its implementation. The CBMD has both advantages and disadvantages. The adoption of the relevant reforms on cross-border mergers by the Proposal would significantly affect the realization of M&A at EU level.

[1] Directive 2005/56/EC on cross-border mergers of limited liability companies. [2005] OJ L 310/1–9 (Cross-border Mergers Directive-CBMD). This directive was repealed and codified by Directive 2017/1132 relating to certain aspects of company law. [2017] OJ L 169/46–127. However, this post refers exclusively to the Cross-border Mergers Directive, because the various studies, reports and papers, as well as national implementing laws, refer to this specific directive.

Thomas Papadopoulos, DPhil (Oxford), is an Assistant Professor of Business Law at the Department of Law at the University of Cyprus.