Definition and legal foundations of the merger
Ein Merger (German: Verschmelzung) refers, in the legal context, to the combination of two or more independent companies into a new legal entity. As a rule, this entails the transfer of all assets of at least one participating legal entity to another legal entity, with at least one of the participating companies ceasing to exist. Under German law, the term is regularly equated with “Fusion”; internationally and in Anglo-American jurisdictions, the term “Merger” is used.
Distinction from other forms of business combinations
A merger must be distinguished from other forms of business combinations such as acquisitions, joint ventures, or strategic alliances. While, in an acquisition, the acquired company may continue to exist legally, a merger usually results in the complete dissolution of at least one of the participating companies. In contrast, joint ventures are generally limited to cooperation and do not result in the loss of legal independence.
Legal framework for mergers in Germany
Foundations of the German Transformation Act (UmwG)
In Germany, the merger—as the classic form of merger—is comprehensively governed by the Transformation Act (Umwandlungsgesetz, UmwG) . Central provisions are found, in particular, in Sections 2 et seq. UmwG. The requirements and procedures of a merger are regulated in detail and concern, in particular, corporations such as public limited companies (AG), limited liability companies (GmbH), as well as other legal entities.
Types of mergers under the UmwG
The UmwG distinguishes between two types of mergers:
- Merger by absorption: The assets of one or more legal entities are transferred to an already existing company. The transferring companies cease to exist.
- Merger by formation of a new company: The assets of two or more companies are transferred to a newly established company; all participating legal entities cease to exist.
Requirements under German law
A merger under German law requires, in addition to a merger agreement, various legally mandated procedural steps:
- Preparation and signing of a merger agreement (Sections 4 et seq. UmwG): The agreement must be notarized.
- Preparation of a merger report (Section 8 UmwG): Managing bodies of the participating companies prepare a report for the shareholders about the legal and economic background of the merger.
- Examination by a merger auditor (Sections 9 et seq. UmwG): An independent auditor assesses, among other things, the appropriateness of the exchange ratio of the shares.
- Approval of the shareholders: Generally, a qualified resolution of the general meeting or the shareholders’ meeting is required (e.g., a three-quarters majority).
- Entry into the commercial register (Section 20 UmwG): The merger only becomes effective upon entry in the commercial register.
Corporate law and antitrust aspects
Corporate law consequences
For listed companies, additional regulatory and corporate law consequences may arise, such as reporting obligations and requirements under the Securities Trading Act (WpHG) or the Stock Corporation Act (AktG).
Antitrust review
A key role is played by the review conducted by national and international competition authorities (Sections 35 et seq. GWB, EU Merger Regulation). Mergers require clearance if certain turnover thresholds are exceeded. This review serves to prevent the creation or strengthening of dominant market positions or the restriction of competition through business combinations.
Tax implications
Mergers can have considerable tax consequences, particularly with regard to income taxes (e.g., corporate income tax, trade tax) as well as real estate transfer tax. The German Reorganization Tax Act (UmwStG) contains specific provisions that allow for a tax-neutral implementation under certain conditions.
Employment law consequences
A merger is regularly accompanied by issues related to labor constitution law. The rights of employees, as well as existing collective agreements and works agreements, must be preserved (Section 613a BGB: transfer of business). Workforces have extensive information and participation rights in relation to a transfer of business.
International mergers and cross-border mergers
European Merger Directive and SE merger
For cross-border mergers, the Merger Directive (2005/56/EC) was introduced at the European level and transposed into national law through Sections 122a et seq. UmwG. It enables mergers of companies from different Member States. In addition, specific rules apply to the European Company (Societas Europaea, SE), which was explicitly created as a pan-European instrument for cross-border mergers.
International antitrust and merger control
For international mergers, control and clearance occur simultaneously in multiple jurisdictions. In addition to the European Commission, non-European antitrust authorities (such as the U.S. FTC and DOJ) may also have jurisdiction. Parallel reviews can significantly affect the timing of the merger.
Legal protection and contestation in the context of mergers
Contesting merger resolutions
Merger resolutions can be contested by shareholders under certain conditions, for example, in the event of violations of shareholder participation rights or breaches of information duties. Such challenges are subject to strict deadlines and formal requirements.
Protection of minority shareholders
The German UmwG provides for specific safeguards, such as the right to cash compensation for minority shareholders who may be disadvantaged by the merger.
Compliance, documentation obligations, and disclosure
Mergers are subject to extensive documentation and disclosure obligations. In addition to entries required under commercial and tax law, the company transparency register and, where applicable, competition law publications must be considered.
Significance of the merger for corporate law
The merger is a central instrument of structural measures in corporate law, enables competitive corporate structuring, and is particularly relevant for group formation, restructuring, and international expansion.
In summary the merger is the legally comprehensively regulated combination of companies through the transfer of assets, subject to strict commercial, corporate, tax, employment, and antitrust requirements. The process is highly formalized and subject to extensive control and transparency obligations, both at the national and international levels.
Frequently asked questions
What legal requirements must be met for a merger under German law?
According to German law, in particular the Transformation Act (UmwG), various legal requirements must be met for a merger (Verschmelzung). First, a merger agreement is required, which must be binding on both the transferring and the acquiring company and must contain mandatory information, including company names, registered offices, legal form, asset transfer, and, where applicable, the exchange ratio of shares. The agreement must be notarized. The shareholders’ meetings (typically the general meeting or the shareholders’ meeting for corporations) must approve the merger agreement with a qualified majority—generally, at least three-quarters of the share capital or shares represented in the resolution is required. In addition, the merger must be entered in the commercial register, upon which it becomes legally effective. Further requirements, such as approval by supervisory authorities (for example, for regulated companies or if merger control under competition law applies), must be observed where applicable.
What participation rights do employees have in the context of a merger?
Employees have extensive participation rights in the context of a merger, especially regarding the information and consultation rights of their representatives (works council, group works council, central works council). Under the Works Constitution Act (BetrVG), the employer must inform the works council in good time about the planned merger and explain the economic effects. If significant disadvantages for the workforce are expected, a reconciliation of interests and social plan may also need to be negotiated. In cross-border mergers, the regulations on employee participation under the German Act on Employee Participation in Cross-border Mergers (MgVG) apply, which, for example, provides for the creation of a special negotiating body to regulate employee participation in the company. Failure to involve employee representatives can render specific resolutions invalid.
How are creditor interests protected in the context of a merger?
Creditors are given special legal protection in the event of a merger in order to prevent their claims from being endangered by the restructuring. According to Section 22 UmwG, creditors have what is known as a right to object: Within a certain period after publication of the merger, they may demand security for their claims if these have not already been satisfied or sufficient security is otherwise unavailable. The usual period is two months. As a rule, the merger may only be registered once all objections have been resolved or sufficient security has been provided. Violations of creditor protection provisions can give rise to claims for damages.
What role does antitrust supervision play in mergers in Germany?
In the case of mergers with a significant impact on competition, merger control under the German Act against Restraints of Competition (GWB) must be observed. Affected companies must examine whether the merger could create or strengthen a dominant market position. If the participating companies exceed relevant turnover thresholds, the transaction must be notified in advance to the Federal Cartel Office (or, in certain cases, the European Commission). The transaction may then only be completed after clearance is granted. Violation can result in the transaction being invalid, and both companies and their representatives may be subject to fines.
How are tax matters legally handled in a merger?
Taxation of a business merger is complex. Under the German Reorganization Tax Act (UmwStG), mergers can be tax-neutral if certain requirements are met (such as a minimum shareholding and the continuation of tax book values). However, there are extensive information obligations towards the tax authorities, particularly regarding tax returns and the documentation required for the valuation of individual assets. Incorrect or incomplete information can lead to adverse tax consequences or even liability risks for the representatives of the participating companies.
What formal requirements must be observed when carrying out a merger?
Formal requirements are strictly regulated. The merger agreement must be notarized. In addition, a merger report must be prepared by the corporate bodies involved, explaining the economic and legal reasons for the measure. For public limited companies, a review by one or more merger auditors is regularly required to confirm the appropriateness of the exchange ratio and the protection of shareholders’ interests. Once the merger is entered in the commercial register, its legal effect occurs, with the assets of the transferring company (including all rights and obligations) passing to the acquiring company.
What legal remedies are available to those affected by a merger?
Affected parties—which may include shareholders, creditors, or employees—have various legal options to challenge a merger. Shareholders may, under certain circumstances, file actions to challenge or annul resolutions related to the merger if they identify procedural or substantive defects. Creditors—see above—may demand security and, if necessary, prevent registration of the merger. Employee representatives may assert violations of participation and information rights in court. In all cases, deadlines and special procedural requirements, as stipulated by the UmwG and the Code of Civil Procedure (ZPO), must be observed. Decisions from such proceedings may delay or, in extreme cases, prevent a merger.
