Merger: Written Report of the Board of Directors/Management Bodies
Following our previous analysis of the draft merger agreement, the next critical stage of the procedure is the preparation of the detailed written report provided for in Article 9 of Law 4601/2019, as well as compliance with the related information obligations. In this context, the Board of Directors or the managers of each of the participating companies are required to prepare a separate report explaining and justifying the advisability and terms of the proposed merger. This report does not replace, where required, either the expert report under Article 10 or the other documents made available to shareholders or partners pursuant to Article 11. Viewed in this light, the provision highlights, on the one hand, the importance of the merger as an act of corporate transformation and, on the other, the central role of the management body in documenting and implementing it.
Purpose of the Report
The above written report under Article 9 §1 is intended to provide substantive and complete information to the partners or shareholders of the companies participating in the merger, so that they can form a judgement on the approval decision with full knowledge of the legal and financial circumstances justifying the transformation.
The explanation of the draft is not limited to a simple description of its terms but requires a comprehensible presentation, a clear identification of the business and corporate objectives served and a substantive justification of the key choices made in the draft, particularly the exchange ratio.
At the same time, the publicity requirement applicable to the report under paragraph 2 highlights the need to strike a balance between transparency and the protection of sensitive business information.
Content of the Report
As regards its content, the report must include a full explanation and justification, from a legal and financial perspective, of the draft merger agreement and, in particular, of the exchange ratio between the corporate participations in the absorbed company or companies and the corporate participations in the absorbing company.
The mere repetition of the terms of the draft, even using different wording, is not sufficient. The report must be specific and practically useful: it must present the individual terms of the merger, their corporate and financial consequences for each participating company, and the key assumptions on which the proposed structure of the transformation is based.
The same principles also apply to a merger by formation of a new company.
Specific Elements of the Content of the Report
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Explanation of the Exchange Ratio
Particular emphasis is placed on the exchange ratio of the corporate participations, which constitutes a central issue addressed by the report.
A mere summary reference to the valuation method or to certain fragmentary calculations used to determine the exchange ratio is not sufficient. On the contrary, the assessed values or, where appropriate, the range of values of the participating companies must be set out, together with an analysis of the factors, assumptions and, potentially, the weighting of multiple methods taken into account in determining them.
Where specialised valuation methods are used, the critical data that affected the result must be identified, as well as any particular difficulties or material uncertainties encountered in the valuation.
In particular, where a Private Company (I.K.E.) participates in the merger, the justification of the exchange ratio must cover all contributions made by the partners, whether capital contributions, non-capital contributions or guarantee contributions.
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Where a Participating Company Belongs to a Group
Where a company participating in the merger belongs to a group, the law requires information to be provided concerning the other companies in the group, insofar as their legal and financial position is necessary in order to explain and justify the draft merger agreement.
The relevant information is neither general nor unlimited but is restricted to material elements affecting the assessment of the terms and consequences of the merger, such as, indicatively, intra-group participations, financing dependencies, guarantees or other elements affecting the overall valuation or the operational position of the merging company.
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Exclusion of Information That May Cause Harm
Pursuant to Article 9 §4, the report is not required to include information and particulars whose disclosure may cause significant harm to one or more of the participating companies or, in the case of a group company, to another company within the group.
This exception must be applied narrowly and not as a general clause permitting the omission of critical information. Not every risk of harm is sufficient. The disclosure must be capable of causing significant damage to the company.
Such information may concern, indicatively, strategic and business planning, sensitive commercial data, intellectual property rights or information relating to hidden reserves, etc.
In all cases, the omission of the relevant information must be specifically and concretely justified in the report, with reference to the particular characteristics of the companies and the circumstances of the proposed merger.
Form
The report must be prepared in writing. Its preparation in electronic form is, in principle, possible, provided that the requirements relating to written form, authenticity and the secure attribution of the statement to the competent body are satisfied.
The report is addressed and submitted to the meeting or the partners of each of the merging companies. A common report for all participating companies is not permitted.
Consequently, each company is required to prepare a separate report, and the number of reports in a merger is equal to the number of companies participating in it.
Publicity
For reasons of transparency and adequate information of interested parties, Article 9 §2 provides for the registration of the report with the General Commercial Registry (G.E.MI.), its publication on the company’s website and its submission to the meeting or the partners of each participating company.
Furthermore, the report forms part of the set of documents made available to shareholders or partners pursuant to Article 11, a fact that makes the timely coordination of its preparation, registration and communication particularly important.
Obligation to Provide Information on Changes
In addition to the report, Article 9 establishes a specific obligation on the Board of Directors or the managers to inform the meeting or the partners, as well as the Boards of Directors or managers of the other participating companies, of any significant change in their assets and liabilities occurring between the date on which the draft merger agreement was prepared and the date on which the decision under Article 14 is taken.
This obligation is intended to ensure that the approval decision is not taken on the basis of outdated information and, in practical terms, operates as a mechanism for updating the informational basis of the transaction.
Exemption from the Obligation to Prepare a Report and Provide Information
By way of exception, neither the preparation of the report under paragraph 1 nor the provision of information under paragraph 3 is required where all shareholders or partners and holders of other securities carrying voting rights in each of the participating companies agree in writing that no report should be prepared or that no information should be provided.
The relevant document must be certified by the persons referred to in Article 446 of the Greek Code of Civil Procedure or by a lawyer.
In addition to this general possibility, the law provides for specific exemptions for partnerships, Limited Liability Companies (E.P.E.) and Private Companies (I.K.E.) where all partners participating in the merger are simultaneously managers.
Consequences of a Defective Report
The preparation of the report under Article 9 is directly connected with the proper formation of the will of the shareholders or partners called upon to approve the merger.
Failure to prepare the report, its defective preparation or failure to comply with the obligation to provide information concerning subsequent material changes may give rise to significant procedural issues even at the stage preceding completion of the transformation.
A report is considered defective where it contains incorrect assessments or calculations or where it omits material information that should have been brought to the attention of the partners or shareholders.
In practice, such deficiencies may lead to challenges concerning the adequacy of the corporate information provided, invalidity, delays in the transaction or judicial disputes between the interested parties.
Furthermore, compliance with the obligations under Article 9 is subject to a preventive legality review, with the result that manifest deficiencies may halt the progress of the procedure until they are remedied.
Finally, given that the relevant obligations are imposed personally on the members of the Board of Directors or the managers, defective performance of those obligations may establish their liability towards the shareholders or partners, their company and, as the case may be, third parties, for losses causally connected with a culpable act or omission in the preparation and implementation of the merger.
The obligation of the Board of Directors or, as the case may be, the managers of each participating company to prepare a separate written report explaining and justifying the advisability and terms of the proposed merger constitutes an essential element of the procedure and not a mere formality without independent regulatory significance.
Failure to prepare the report or its defective preparation may raise issues concerning the legality of the procedure, delay or complicate completion of the transformation and, as the case may be, establish the liability of the persons vested with the relevant responsibility.
Finally, this report must be clearly distinguished from the expert report under Article 10 of Law 4601/2019, which performs a different function and will be the subject of our next analysis.
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.