Examination of the Draft Merger Agreement by Experts
Article 10 of Law 4601/2019 provides that the draft merger agreement (prepared during the preceding stages of the relevant procedure) is, in principle, subject to examination. The examination is carried out by one or more independent experts for each of the companies participating in the merger. The experts are appointed in accordance with the prescribed procedure and prepare a written report addressed to the shareholders (or partners), which is subject to publicity requirements. Its focus is, in particular, on examining whether the proposed exchange ratio is fair and reasonable; in this way, the experts contribute to providing shareholders or partners with more complete information before the approval decision is taken.
Purpose
The experts’ report serves to provide an impartial and technically substantiated assessment of the draft merger agreement by persons possessing specialised knowledge and independence. In conjunction with the publication of the draft and the written report of the Board of Directors or, as the case may be, the managers, it strengthens the informational basis on which the shareholders or partners are called upon to decide.
Its function is not, of course, to substitute the business judgement of the competent bodies; its purpose is to add an independent level of review as regards the financial and valuation basis of the transaction.
Appointment of Experts
At the choice of the participating companies (and subject to the specific provisions of paragraph 4), certified public accountants and audit firms may be appointed as experts. Certified valuers, accountants-tax consultants holding a Class A professional licence, as well as economists registered with the Registry of the Economic Chamber of Greece, may also be appointed.
In all cases, the experts must satisfy the statutory independence requirements (Article 21 of Law 4449/2017 and Article 17 §4 of Law 4548/2017). They must also not be in a position that could call into question their objectivity towards the merging companies.
As regards the appointment procedure, the law distinguishes according to whether or not the proposed expert is officially registered in a public registry. It also provides, subject to certain conditions, for the possibility of appointing a common expert for all participating companies.
This option may, in practical terms, simplify the procedure and reduce its cost; it does not, however, remove the need to carefully assess the independence and suitability of the person or persons who will undertake the relevant examination.
Content of the Report
In principle, the report is addressed to the meeting or the partners of the company for which it is prepared. In practice, where common experts have been appointed for all participating companies, the assessment may be set out in a single document. It is sufficient that it is clear that the information requirements of each individual company are covered.
The experts’ obligation is not limited to a formal examination of the draft. They are required to examine objectively the information on which the proposed merger is based. Their report must therefore adequately explain all the financial assumptions underlying the proposed transformation. It must also explain the rationale behind the exchange ratio and its critical implications for the shareholders or partners.
For this purpose, the experts rely on valuation methods appropriate to the particular case, which may be applied individually or, preferably, in combination. In their report, they must state the method or methods they adopted and explain why they consider them appropriate. They must also set out the values resulting from the application of each method. They are further required to justify the weight attributed to specific methods and describe the difficulties encountered during the valuation. The emphasis, therefore, is not on an abstract or general description but on transparent and verifiable valuation documentation.
The expert report does not operate as an independent corporate decision, nor does it replace the other formalities required for the merger. Its practical significance lies primarily in providing an independent basis for reviewing the proposed exchange ratio and, more broadly, the financial balance of the draft.
A central element of the report is the experts’ clear statement as to whether, in their opinion, the proposed exchange ratio is fair and reasonable. This judgement is formed on the basis of the quantitative and qualitative valuation data, the assumptions adopted and the specific circumstances of the proposed transformation. This opinion is not legally binding on the meeting or the partners, but it carries particular informational and evidentiary weight in the assessment of the draft.
Information Provided to the Experts
Article 10 §6 recognises the right of each expert to request from the participating companies any useful information and document, as well as to carry out any necessary examination.
Correspondingly, the management bodies are required to facilitate the expert’s work in a substantive and effective manner: they must provide, without unjustified delay, the information necessary for completion of the examination.
Exclusion of Information from the Report
The provision concerning the exclusion of information from the published report of the Board of Directors/manager under Article 9 applies by analogy (Article 10 §5).
The provision covers cases in which disclosure of such information could cause significant harm to one of the participating companies. Where applicable, it also covers harm to another company within the group.
This exception does not operate as a general authorisation to withhold critical information. It presupposes a genuine risk of significant harm and a specific statement in the report itself of the reasons for the omission.
The relevant judgement lies with the experts. They are required to independently balance the requirements of transparency against the protection of commercially sensitive information.
Form and Publicity of the Report
As regards its form, the report is prepared in writing and may also take electronic form, provided that the statutory requirements are satisfied.
The report is addressed to the meeting or the partners of the company concerned, is registered with the G.E.MI. and is published on its website.
This publicity serves the transparency of the procedure and the timely access of interested parties to the content of the report.
No Obligation to Prepare a Report
Examination of the draft and preparation of an expert report are not required where there is a written agreement in each of the participating companies.
The agreement must be given by all shareholders and holders of other securities carrying voting rights. Correspondingly, in companies with partners, all such partners must agree in writing.
This possibility may accelerate the transformation and reduce its cost. It presupposes, however, a conscious acceptance that a critical stage of independent valuation assessment is being omitted.
For this reason, the relevant waiver (with the authenticity of the signature certified and bearing a certain date) must be treated with particular care in practice.
Cases of Material Changes
If, following completion of the expert report and before approval of the merger, material changes or events occur, a practical need arises to reassess the data underlying the proposed exchange ratio.
This applies in particular where the changes affect the valuations or the exchange ratio (Article 9 §3). In such a case, the management body must, in all circumstances, fulfil the information obligations imposed upon it.
Depending on the nature and extent of the change, supplementary involvement of the expert may also become necessary.
If, moreover, serious reservations arise on the part of the competent management body regarding the conclusions of the report, clarifications may be requested in practice. New information may also be provided or, before completion of the procedure, the possibility of appointing a new expert may be considered.
The new expert’s report will again be subject to publicity requirements. In all cases, such divergences must be managed in a timely manner. In this way, neither the reliability of the corporate information provided nor the security of the transaction is jeopardised.
Consequences of the Report
The experts’ report does not formally bind the meeting or the partners who will ultimately decide on the merger. It does, however, carry increased specific weight, as it provides an independent technical valuation of a critical aspect of the draft.
For this reason, its conclusions may materially influence both the proposed exchange ratio and the assessment of the legality and adequacy of the procedure.
It goes without saying that they may also form the basis for establishing potential claims by shareholders/partners who have suffered loss.
Defects in the Report
Failure to prepare the report where it is required, or materially defective content, may give rise to serious issues concerning the legality of the merger procedure.
It may also affect the position adopted by the shareholders or partners when taking the approval decision, resulting in a defect in that decision or even in the annulment of the merger.
Defects may arise, among other things, from methodological errors, incorrect assumptions, incomplete valuation data or inadequate reasoning supporting the final conclusion.
Depending on the circumstances, liability may be sought in connection with the failure to properly appoint or make use of an expert. Liability may also be sought in connection with the defective performance of the expert’s own duties, provided that the general conditions for liability are satisfied.
The examination of the draft merger agreement by experts does not constitute a formal or secondary stage of the procedure. It constitutes a critical mechanism for the independent review of the exchange ratio and the financial substantiation of the transformation.
Its omission, where required, or its treatment as a mere formality may lead to delays, challenges to the validity of the transformation and even issues concerning the liability of the members of the management of the participating companies.
The experts’ report must, however, be clearly distinguished from the written report of the Board of Directors or the managers. It performs a different and, by definition, independent function within the context of the merger.
In any event, these reports do not replace the right of shareholders (or partners) to examine directly the entirety of the merger documents. These documents, however, will be addressed in our next article.
Managing Partner
Koumentakis and Associates Law Firm
Note: This article forms part of a broader series published by our Law Firm on corporate transformations. In this series, we attempt an article-by-article analysis—always from a business-oriented perspective—of the principal relevant legislation, Law 4601/2019.