Company Mergers: Concept, Forms & Key Stages of the Procedure
In a previous article in this series, we highlighted the role of corporate transformations as a tool of business strategy. In this article, we focus on one of the forms of transformation provided for by Law 4601/2019: the merger.
A merger constitutes a mechanism for the concentration of businesses, allowing them to operate under a single business entity without interrupting their business continuity.
Concept and Key Characteristics
A merger is the transaction through which all the assets of one or more companies are transferred, by universal succession, to another company—either existing or newly incorporated—with the simultaneous dissolution of the merging companies without liquidation.
Mergers are governed by Articles 6–53 of Law 4601/2019. The key conceptual characteristics of a merger, irrespective of its specific form, are the following:
(a) The transfer, by universal succession, of all the assets (rights, obligations and legal relationships) of the absorbed or merging company to the absorbing company or to the new company resulting from the merger.
(b) The dissolution of the absorbed or merging company without liquidation.
(c) The allocation to the shareholders or partners of the absorbed or merging company of corporate participations in the company resulting from the merger, possibly together with a limited cash payment.
Forms of Merger
According to Article 6 of Law 4601/2019, a merger is carried out either by absorption or by the formation of a new company.
(a) Merger by Absorption
More specifically, a merger by absorption is the transaction through which one or more companies transfer to another, already existing company, following their dissolution without liquidation, all their assets. In consideration, their shareholders or partners receive corporate participations in the absorbing company and, possibly, a cash payment.
(b) Merger by Formation of a New Company
A merger by formation of a new company is the transaction through which two or more companies transfer to a new company, which they incorporate, following their dissolution without liquidation, all their assets. In consideration, their shareholders or partners receive corporate participations in the new company and, possibly, a cash payment.
The provisions governing mergers by absorption apply, mutatis mutandis, to mergers by formation of a new company, to the extent that they are not incompatible with the nature of the latter.
The core of the procedure therefore remains the same: draft merger agreement, publicity, management reports, examination by experts, information to shareholders and employees, protection of creditors, approval by shareholders or partners, agreement, publicity and legality review.
The essential difference lies in the fact that, in the case of a merger by formation of a new company, the provisions governing the incorporation of the new company additionally apply.
No form of merger other than those referred to above may be governed by Law 4601/2019. Furthermore, the two forms of merger may not be combined.
An acquisition, which is governed by Article 37 of Law 4601/2019, although not a form of merger, constitutes a transaction treated as equivalent to a merger by absorption. The acquisition entails the transfer of all the assets of one or more companies to another company, following their dissolution without liquidation. It differs from a merger in terms of the consideration, which does not consist of corporate participations in the acquiring company but, as a rule, of a cash payment or another asset equivalent to the shareholders or partners of the acquired companies.
The Merger Procedure: Key Stages
The merger procedure, as set out in Articles 7 et seq. of Law 4601/2019, is organised as a sequence of distinct stages, serving, on the one hand, the transparency of the transformation and, on the other, the protection of the shareholders, partners, employees and creditors of the companies participating in it.
More specifically, these stages are as follows:
(a) Preparatory Stage and Formulation of the Basic Terms
At this stage, the competent bodies of the participating companies assess the advisability of the merger, formulate its basic terms and proceed with negotiations regarding its essential elements.
Although this phase is not expressly provided for by law as a separate stage, it is decisive, since it is during this phase that the terms subsequently to be reflected in the draft merger agreement are established.
(b) Preparation of the Draft Merger Agreement
At the next stage, following a relevant decision of the competent management bodies—the Board of Directors or managers—of the companies participating in the merger, the draft merger agreement is prepared.
This draft constitutes the fundamental document of the merger, as it sets out its essential elements.
More specifically, according to Article 7, the draft must include, at a minimum: the legal form, corporate name, registered office and G.E.MI. number of the companies; the exchange ratio of the corporate participations and, where applicable, the amount of the cash payment; the manner in which the new participations are to be delivered; the date from which they confer a right to participate in profits; the date from which the transactions of the absorbed company are treated, for accounting purposes, as having been carried out on behalf of the absorbing company; and any special rights or advantages granted to certain persons.
(c) Publicity and Information of Interested Parties
The draft merger agreement is registered with and published in the G.E.MI. for each company participating in the merger (Article 8 of Law 4601/2019).
Registration must take place at least one month before the decision approving the draft pursuant to Article 14, thereby serving to inform the partners or shareholders, creditors and other interested parties of the forthcoming transformation.
At the same time, the law safeguards the right of shareholders and partners to receive substantive and adequate information regarding the merger before the decision approving it is taken.
For this purpose, the documents provided for in Article 11 are made available to them, setting out the content and consequences of the proposed merger (draft merger agreement, financial statements, accounting statement, etc.). This information may be made available either at the company’s registered office or, subject to certain conditions, through its website.
Completion of the publicity formalities relating to the draft further activates the mechanisms for the protection of creditors.
Within thirty days from publication of the draft, creditors of the companies participating in the merger whose claims arose before publication and have not yet fallen due may request appropriate safeguards, provided that they demonstrate that the financial situation of the companies as a result of the merger makes such protection necessary.
(d) Management and Expert Reports
The management bodies—the Board of Directors or managers—of each participating company prepare a detailed written report in which they explain, in an understandable manner, and justify, from a legal and financial perspective, the draft merger agreement, with particular emphasis on the exchange ratio of the corporate participations (Article 9 of Law 4601/2019).
The purpose of this report is to enable the shareholders or partners to understand the rationale behind the transformation, its key terms and its consequences.
The draft merger agreement is additionally examined by independent experts, who prepare a relevant report addressed to the shareholders or partners.
This examination serves as an additional safeguard for the transparency and reliability of the procedure, allowing an informed assessment to be made.
In this context, the experts assess, in particular, whether the proposed exchange ratio is fair and reasonable, which valuation methods were followed, whether those methods are appropriate in the particular case, and the value resulting from each of them.
(e) Decision Approving the Merger
At corporate level, the merger is completed through its approval by a relevant decision of the competent corporate bodies—the meeting or the partners—of the participating companies.
This decision covers, at a minimum, the draft merger agreement and the amendments to the articles of association necessary for its implementation.
Where there are several classes of corporate participations, the approval of each individual class is also required where its rights are affected.
(f) Merger Agreement and Legality Review
Following approval, the merger agreement is drawn up in accordance with Article 15 and is subject to the prescribed publicity formalities for each company participating in the merger.
Before completion of the publicity formalities, the competent authority carries out the prescribed legality review. At this stage, all acts and formalities of the procedure are reviewed as to their legality.
(g) Completion of the Procedure
The merger procedure is completed upon registration of the merger agreement with the G.E.MI. in respect of the absorbing company or the new company, as applicable.
From that point in time, the effects of the merger occur automatically: universal succession takes place, namely, all the assets of the absorbed or merging company are transferred to the absorbing or new company; the shareholders or partners of the absorbed or merging company become shareholders or partners of the absorbing or new company; and the absorbed or merging company ceases to exist without liquidation.
A merger constitutes a particularly legal instrument for managing and addressing corresponding business needs. Its forms are strictly defined by law, as are the procedure to be followed and the key stages required for its completion.
The most important of these stages—beginning with the preparation of the draft merger agreement—will be addressed in our subsequent articles.
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.