Mergers take place though the acquisition (absorption) of one or more companies by another, or else by the incorporation of a new company. In part, such mergers are governed by common regulations.

The acquisition (absorption) of one company by another holding 90 % or more of the shares, units and securities conferring voting rights in the absorbed company is one form of the process for which formalities have been simplified.

A merger by incorporation of a new company is the process by which multiple companies transfer all of their holdings (assets and liabilities) to a new company which they have formed, following their own dissolution, distributing shares or units in the new company to their shareholders.

In both types of mergers, a cash adjustment not exceeding 10 % of the nominal value of the distributed stocks or units or, if they have no nominal value, of their accounting par value, may be paid.

 Cross-border mergers and mergers involving a société européenne (SE – European Company) are subject to additional regulations.

Who is concerned

Mergers may take place between any companies with legal personality and economic interest groups (EIGs).

Prerequisites

A merger may also take place when one or more of the companies or EIGs being absorbed or dissolved:

• are engaged in bankruptcy proceedings, a scheme of composition with creditors or a similar procedure such as deferment of payment, controlled management, etc.; or
• are in the process of liquidation, provided they have not yet begun to divide up their assets.

A société à responsabilité limitée (limited liability company), a société coopérative (cooperative company) or an EIG can acquire another company or EIG if and only if the partners meet the conditions required to acquire the status of partners or members of the absorbing company or EIG.

The resulting company, formed by the merger, must necessarily be a société anonyme (public limited company) when:

• one of the companies merging is managed under an employee participation regime;
• the company resulting from the merger is a company incorporated under Luxembourg law governed by the same system.

How to proceed

Preparing for the merger

Companies intending to enact a merger must produce a document known as the draft terms of merger. This is an important document providing information to third parties and the company partners. However, it is not legally binding on the company since all formal decisions are taken at a later stage.

The draft terms of merger must specify:

• the type, name and registered office of the merging companies and those proposed for the company resulting from the merger;
• the ratio applicable to the exchange of units or shares and the amount of any cash payments;
• the terms for the allotment of units or shares in the absorbing/new company;
• the effective date from which:
  • these units or shares entitle the holder to share in the profits of the absorbing/new company, and any specific conditions attaching to that entitlement;
  •  from an accounting point of view, the transactions of the merged company, or the company that is to be dissolved, will be considered as being those of the absorbing/new company;
• the rights conferred by the absorbing/new company on members enjoying special rights or on holders of securities other than shares or units, or the proposed measures concerning such rights;
• any special advantages granted to the experts advising on the merger or to the members of the companies' controlling bodies.

The draft absorption must be filed with the Trade and Companies Register (RCS) for publication in the Electronic Compendium of Companies and Associations (RESA) at least one month prior to the decision of the general meeting effecting the merger.

If the absorbing company holds all the shares, units and securities carrying voting rights in the company/companies being absorbed, then the draft plan need not include:

• the ratio applicable to the exchange of units or shares and the amount of any cash payments;
• the terms for the allotment of units or shares of the absorbing company;
• from an accounting point of view, the date from which the transactions of the absorbed company will be considered to being those of the absorbing company.

These rules still apply in the case of a European company.

Enactment of the merger

Company management's report on the terms of the merger

The management's report is intended for the partners. It explains the legal and economic grounds for the planned merger and, in particular, the ratio applicable to the exchange of units or shares.

This report may contain the same information as the auditor's report.

To simplify the procedure, it is possible to forego this report, if so decided unanimously by the partners and other holders of voting rights.

Statutory auditor's or expert's report on the terms of the merger

The role of the statutory auditor is to produce a report on the terms of the merger for each of the companies. Their involvement is mandatory. However, the managerial bodies of the companies that are to be merged may reach agreement as to the appointment of an independent expert, who will be appointed by the President of the District Court having jurisdiction over the district where one of the merging company's registered offices are located.

The report must specify:

• whether the exchange ratio is relevant and reasonable;
• the method or methods employed to arrive at the proposed exchange ratio;
• whether such methods are appropriate;
• the relative importance attached to these methods in determining the stated value;
• particular difficulties, if any, in carrying out the assessment.

To simplify the procedure, the partners and other holders of voting rights may decide to forego such a report. In that case, the decision must be unanimous.

Procedures for communicating with partners

A merger is a complex procedure. As such, partners must be able to make decisions in full awareness of the facts.

Hence, at least a month prior to the date of the general meeting which is to rule on a planned merger, each partner is entitled to acquaint themselves with the following documents at, which shall be made available at the registered office:

• the draft terms of the merger;
• the annual financial statements;
• the merging companies' management reports for the last 3 financial years;
• where applicable, an accounting statement closed on a date which must not be earlier than the first day of the third month preceding the date of the draft terms of the merger, if the latest annual accounts relate to a financial year that ended more than 6 months before said date;
• where applicable, the management's and the auditor's reports relating to the merger.

Each partner is entitled to this information on demand, free of charge. The company may opt to send this information in electronic format, if the partners are amenable. Alternatively, the information may be published online.

If the absorbing (acquiring) company holds all the shares, units and other securities carrying voting rights in the companies being absorbed, the following requirements do not apply:

• management report;
• auditor's report;
• procedures for communicating with partners.

When a merger by acquisition is conducted by a company holding at least 90 %, but less than 100 %, of the shares, units and other securities carrying the right to vote at the absorbed company's/companies' general meetings, the auditor's report is not required, and the procedures for communicating with partners do not apply if:

• the minority partners in the company being absorbed can exercise their right to have their shares or units redeemed by the absorbing company;
• they are entitled to consideration in the amount of the value of their shares or units;
• in the event of disagreement as to the amount of such consideration, the latter shall be determined by a judge.

Merger decision

The merger requires the approval of the partners, shareholders, or holders of securities with voting right of each of the merging companies.

The decision requires that the conditions of quorum and majority, as provided for in the case of amendments to the articles of association, be met.

The minutes of the general meetings at which the decision to proceed with the merger is taken are established by notarial deed. The same is true for the draft terms of merger when the merger does not require the approval of the general meetings of all the companies being merged.

The notary must verify and certify the existence and legality of the documents and formalities incumbent upon the company on whose behalf they are working, and of the draft terms of merger.

Except in special circumstances, the approval of all partners is required in partnership companies, as their rights may change. This rule also applies to holders of securities representing the capital.

In sociétés en commandite simple (limited partnerships) and in sociétés coopératives (cooperative companies), the partners' voting rights are proportional to their holdings in the company.

The approval of all partners is required for the absorbing entities, or for those being absorbed, when they are:

• sociétés en nom collectif (SENC – partnerships);
• cooperative companies in which the partners are jointly liable without limit;
• civil companies;
• economic interest groups.

The approval of all partners is required for the companies being absorbed when the absorbing company is:

• an SENC;
• a limited partnership;
• a cooperative company in which the partners are jointly and severally liable without limit;
• a civil company;
• an EIG.

Unanimous approval is required on the part of the holders of non-capital shares in:

• the absorbing companies, or those being absorbed, which are:
  • partnerships (SENC);
  • cooperative companies in which the partners are jointly and severally liable without limit;
  • civil companies;
  • economic interest groups.
• the companies being absorbed, when the absorbing company is:
  • an SENC;
  • a limited partnership;
  • a cooperative company in which the partners are jointly and severally liable without limit;

In other cases, notably when the merger by acquisition of a company absorbing the other(s) holds at least 90 %, or all of the shares, units and other securities with voting rights at the absorbed company's/companies' general meetings, the approval of the merger by the general meeting of the absorbing company is not necessary if:

• the absorbing company has already published details in the RESA, at least a month prior to the general meeting of the company/companies being absorbed and convened to make a judgement on the draft terms of the merger;
• all of the partners in the absorbing company have been able to acquaint themselves, at their registered office, with the planned merger, the annual financial statements and management reports for the last 3 financial years and, where applicable, the reports produced by experts or the company's management bodies;
• one or more partners in the absorbing company, holding at least 5 % of shares or units in the subscribed capital, are entitled to call, by no later than the day following the general meeting of the absorbed company, a general meeting of the absorbing company to rule on whether to approve the merger. The meeting must be held in the month in which it is called.

However, publication in the RESA is required for each of the companies concerned, at least one month before the transaction between the parties takes effect.

In limited partnerships and partnerships limited by shares, the approval of all partners is required.

If there are several classes of shares, units or securities, whether or not they are representative of the capital, and if the merger will alter the respective rights attaching to them, then the conditions of quorum and majority provided for by law or in the articles of association must be met for each such class.

The merger decision must be published in the RESA.

Creditors' rights

The creditors of the merging companies, whose receivables pre-date the publication of the notification of the merger, may demand securities in respect of their receivables, provided they can demonstrate that:

• the merger endangers their ability to exercise their rights;
• the company:
  • has not provided them with adequate guarantees;
  • does not have sufficient guarantees available.

The request must be sent, within 2 months, to the district court having jurisdiction over the district where the debtor company's registered office is located. Such a request will not halt the merger.

The debtor company may set aside the request by paying back the creditor. Should they fail to do so, if the security is not delivered by the set deadline, then the debt is payable immediately.

The bondholders of companies taking part in a merger also enjoy the same rights.

The holders of securities to which special rights are attached, other than shares or units, must enjoy rights in the newly formed companies at least equivalent to those they held in the absorbed company, unless a modification of these rights has been duly approved by a meeting of those security holders, as is required for a change to the Articles of Association. Notably, in the event of differences of opinion, the securities in question can be redeemed at the price at which they were valued in the preparations for the merger.

Liability

If the absorbed company or the absorbing company is:

• an SENC;
• a limited partnership;
• a partnership limited by shares;
• a cooperative company in which the partners are jointly and severally liable without limit;
• a civil company;
• an EIG;

the partners or members remain jointly or severally liable, depending on the circumstances, to third parties, for the commitments of the dissolved company prior to:

• the enforceability of the merger against third parties; or
• the merger, in the case of the absorbing company.
  

However, they may be discharged of such liability by an express clause inserted into the draft merger document and the merger notification duly published in the RESA.

Publicising the merger

The absorbed company must publicise its dissolution in the RESA.

The absorbing company must, where applicable, publicise the capital increase or the amendments to its Articles of Association in the RCS.

Protection of partners in the absorbed company

Partners in the absorbed company who believe their interests to have been prejudiced may hold the members of the governing bodies, and the experts who contributed to the merger, liable on the grounds of fault for a period of 5 years.

Nullity of a merger

A merger can only be declared null and void by a court. Proceedings to have a merger nullified by the court can only be brought within 6 months of the publication of notice thereof. The court may grant the company time to rectify the situation.

The grounds for nullity are limited and only concern fundamental rules, such as:

• the absence of a notarial deed;
• the nullity of the merger decisions.

The order declaring the merger to be null and void must be filed with the RCS for publication in the RESA. The decision may be appealed within 6 months.

The absorbing company continues to be bound by the obligations entered into.

Effects of a merger

Dissolution of the absorbed company

In a merger by absorption (acquisition), the absorbed company is dissolved, and no longer exists as a legal entity.

In a merger by incorporation, both of the pre-existing companies are dissolved.

Transfer of holdings

The holdings of the dissolved company, comprising its assets and liabilities, are transferred to the absorbing company or to the new company formed as a result of the merger. This transfer takes place automatically, without the need for any formalities.

Nevertheless, the transfer of ownership of movable/immovable assets, industrial/intellectual property and other real assets other than securities must be carried out in accordance with the specific applicable laws in order to be enforceable against third parties.

The liabilities to be transferred includes both known debts and any debts which may not have been disclosed during the merger process.

Partners

The partners in the absorbed company become partners in the absorbing company, and the shares they hold in the absorbed company are cancelled.

Contracts

Ongoing contracts, including employment contracts, are automatically transferred to the absorbing company or the newly formed company.

Entry into effect

The holdings of the absorbed company are transferred automatically to the absorbing company as soon as the merger is enacted.

However, with respect to third parties, as before, it is the publication of the notice of the merger in the RESA which renders the transactions enforceable.

Merger by consolidation

A so-called "merger by consolidation" is a special case of a merger by acquisition. The absorbing company already holds all of the capital in the absorbed company before the merger is enacted.

In such circumstances, the merger procedure is simplified. As the merger has effectively taken place, from a financial point of view, the formalities pertaining to the protection of various parties' interests need not be as complicated.

The management report and the auditor's report are not required.

The merger does not lead to the issue of new shares.

When an absorbing company holds at least 90 % of the companies being absorbed, the general meeting of the absorbing company must approve the merger, unless:

• the absorbing company published a merger notice in the RCS at least a month prior to the general meeting of the company/companies being absorbed, ruling on the planned merger; or
• all partners in the absorbing company were able to familiarise themselves, at least one month before the assembly, with the draft terms of the merger and the merging companies' annual financial statements and management reports for the past 3 financial years, and any other reports that may have been produced; or
• the partners in the absorbing company, collectively holding at least 5 % of shares, have asked for a meeting to be called. They have the option to do so up until the day after the general meeting of the company being acquired. The meeting must be held in the month in which it is called.

The management report, the auditor's report and the procedure for the examination of the financial documents are not required if:

• the minority partners in the company being absorbed have been able to exercise their right to have their shares or units redeemed by the absorbing company; or
• have received consideration corresponding to the value of their shares or units.

In the event of disagreement as to the amount of such consideration, the latter shall be determined by a judge.

These specific rules do not apply to cross-border mergers and to European companies.

Taxation

In the absence of special measures, each legal stage of the merger is taxed separately. Consequently, the operation may sometimes prove extremely costly in terms of taxes.

However, a preferential treatment scheme has been implemented so as not to deter businesses from carrying out corporate restructuring. The scheme is driven by the twofold desire to make mergers as easy as possible from a taxation standpoint and to safeguard the Inland Revenue's rights over latent capital gains existing on the day of the merger.

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