Merger: Executive Summary

A merger brings together two companies to form one resulting company. By merging, the transferring company is dissolved without being liquidated.

The following elements are typical for mergers:

• Assets and liabilities of the merging companies are combined by operation of law.



• According to the principle of membership continuity, the partners and shareholders of the merging entities become partners or shareholders of the surviving company.

• In what is referred to as an absorption, a target company merges into an acquiring company. By operation of law, the acquirer not only becomes the owner of the assets of the target company but also becomes subject to the actual and contingent liabilities of the target. Upon finalizing the transaction, the target company disappears, and its dissolution is registered in the Commercial Register. Thus, it ceases to exist while the acquiring company continues to exist. Characteristic of this form of merger is that, prior to the merger, the acquiring company has previously existed as a legal entity.



• In what is referred to as a combination, two (or more) companies merge on equal terms and form a newly established entity. It is the characteristic of this form of merger that the acquiring company originates from the transaction itself.

• The merger must be based on recent financial reports. When the members of the transferring entity receive shares in an acquiring entity, all the involved entities must be valued to determine an exchange ratio. These valuations are at least partly based on the balance sheets of the involved entities. An interim balance sheet must be prepared if any material changes in financial positions have occurred since the last balance sheet has been established or if the balance sheet reflects a date more than six months before the merger agreement is signed.



• The executive bodies of the merging companies must sign a written merger agreement. The content of the merger agreement is, to a large extent, legally stipulated: it must contain, among other elements, the identification of the involved parties, the share exchange ratio (including the amount of an eventual equalisation payment, which is limited to 10% of the actual value of the shares newly issued in the acquiring company), the amount of compensation payment (if any) in case of squeeze out mergers, the date from which the transactions of the transferring entity shall be treated for accounting purposes as being those of the acquiring entity.



• The supreme administrative or management bodies of the merging companies must issue either a combined or two separate merger reports, setting forth the reasons for and the objectives of the transaction. Here again, the minimum contents of the report are legally stated. They include (among other issues) explications about the purpose and effects of the merger, the merger agreement itself, the share exchange ratio and, in case of mergers between legal entities with different legal forms, the obligations that may be imposed on members in the new legal form.



• Balance sheets, merger agreement, and merger report(s) must be audited by a specially qualified auditor. The legal entities involved may appoint a joint auditor. The auditor is required to issue a report expressing an opinion on various matters as to, for example, whether the exchange ratio (or the compensation payment) is reasonable, whether the method used to arrive at the exchange ratio (or compensation payment) is sound, and the reasons why the specific method applied is adequate. The auditor, however, does not have to confirm that the transaction and specifically the exchange ratio is “right or wrong.”



• Merger agreement, merger report(s) and audit report shall then be disclosed, together with the corresponding final reports, at the corporate domicile of the involved companies for the members’ inspection. The members (shareholders or partners) are entitled to inspect the demerger documents during 30 days prior to their resolution on the merger. The right of inspection is designed to allow an informed decision.



• As a final step, the general meeting shall resolve all essential issues regarding the merger. The merger resolution must be notarised. The necessary majorities/quorums are stipulated in the Merger Act; they notably depend on whether there will be additional duties imposed on the shareholders (which requires their unanimous consent). Because a merger with compensation payment only breaches the principle of membership continuity, 90% of the members of the transferring entity must approve such form of merger. If, between the signing of the merger agreement and the merger resolution, there are material changes in the assets or liabilities of an entity involved in the merger, the supreme administrative or management body of such entity must inform both the general meeting and the supreme body of the other entities involved, in order to consider whether the merger must be amended or even abandoned.



• Finally, the merger takes legal effect with the entry into the Commercial Register. Upon registering the merger, the transferring company is simultaneously deleted in the register. At this moment, all the assets and liabilities, as well as contractual relationships, are automatically and legally transferred by universal succession to the receiving entity.

• If the acquiring capital company holds all shares conferring voting rights in the transferring capital company, the involved companies might do without most of the merger documents and actions explained above (notably without the merger report, audit by a specially qualified auditor, members’ inspection as well as shareholders’ resolution).



• If the acquiring capital company holds at least 90% of the shares conferring voting rights in the transferring capital company, the involved companies might do without some of the merger documents and actions explained above (notably without the merger report and the shareholders’ resolution).