Term and Fundamentals of Mergers
The term “Merger” (in German: “Fusion”) refers, in the legal context, to the amalgamation of two or more independently existing companies into a single economic and legal entity. The aim of a merger is generally the strategic consolidation of resources, an increase in competitiveness, and the opening up of new markets. Unlike an acquisition, a merger involves an equal combination, often with the creation of a new joint entity.
Legal Framework and Statutory Principles
National Legal Principles in Germany
Transformation Act (UmwG)
Mergers of companies in Germany are primarily regulated under the Transformation Act (UmwG). The UmwG provides for different types of transformations, with the “merger by absorption” (§§ 2 et seq. UmwG) and the “merger by formation of a new entity” (§§ 60 et seq. UmwG) being of central importance.
Stock Corporation Act (AktG) and GmbH Act (GmbHG)
In addition, corporate law provisions such as the Stock Corporation Act or the GmbH Act apply. In particular, §§ 320 to 327a AktG govern specific aspects such as squeeze-out or the merger of listed companies, while the GmbHG details the rights and obligations of the involved entities.
European Legal Framework
SE Regulation and Corporate Law Directives
At the European level, significant legal foundations can be found in the SE Regulation (Regulation [EC] No. 2157/2001) on the European Company (Societas Europaea, SE) and in various corporate law directives, including Directive 2017/1132/EU, which in particular governs cross-border mergers.
International Context
Beyond Europe, mergers are subject to each country’s national corporate and tax law provisions, with U.S. regulations (such as the Delaware Corporate Law) playing a significant role due to the volume of international transactions.
Types of Mergers and Their Legal Structure
Merger by Absorption
In this form, an existing company assumes the assets and liabilities of one or more other entities. These are transferred to the acquiring company and cease to exist as independent legal entities. The merger by absorption is the standard case in German merger law.
Merger by Formation of a New Entity
Here, two or more entities are merged, without liquidation, into a newly formed company. The previous companies are dissolved, and the newly created entity assumes all rights and obligations of the transferring legal entities.
Cross-Border Mergers
Cross-border mergers involve companies from different states within the European Economic Area (EEA) and are permissible under the relevant EU company law directives and, if applicable, additional national regulations. Recognition, implementation, and tax treatment may differ.
Process and Legal Steps of a Merger
Drafting Phase of the Merger Agreement
The process of a merger begins with the preparation of a merger agreement (§ 4 UmwG), which defines the framework conditions, the exchange ratio of shares, the effective date of the merger, and other modalities.
Review and Approval Procedures
Both the management board, supervisory board, and the general meeting must approve the agreement. In some cases, review by an independent auditor is also required to safeguard the interests of the shareholders (§ 8 et seq. UmwG).
Creditor Protection and Employee Rights
The protection of creditors and employees is a fundamental part of a merger. Creditors can request collateral in accordance with §§ 22 et seq. UmwG if their claims are endangered by the merger. Employee representatives must regularly be involved, in some cases by the establishment of a special negotiation body.
Registration and Legal Effectiveness
Upon registration in the commercial register, the merger becomes legally effective (§ 20 UmwG). All assets and liabilities of the transferring company or companies are transferred by universal succession to the acquiring or newly created entity.
Merger Control and Antitrust Law
Notification to Competition Authorities
Mergers are often subject to merger control. In Germany, this is the responsibility of the Federal Cartel Office; at the European level, it is the European Commission. A merger must be reported once certain turnover thresholds are exceeded (§§ 35 et seq. GWB).
Review and Prohibition
Competition authorities assess whether the merger could significantly impede effective competition. In the event of a restriction of competition, the merger can be prohibited or made subject to conditions.
Tax and Accounting Aspects
Tax treatment in Germany is primarily governed by the Transformation Tax Act (UmwStG). The aim is to ensure the tax-neutral transfer of assets, provided the business continues after the merger. Accounting issues arise, among other things, under § 24 UmwG and mainly concern the transfer of assets and liabilities, valuation principles, and the creation of valuation reserves.
Protection of Minority Shareholders
Minority shareholders must be specially protected during a merger. Depending on the legal form, they are entitled to compensation payments or cash severance (§§ 29 et seq. UmwG) if their corporate position is affected by the merger.
Legal Remedies
Affected shareholders, creditors, and employees may take legal action against a merger, such as by filing actions for rescission (§ 246 AktG), actions for nullification, or applications for interim relief. The UmwG provides for specific rights of challenge to prevent abuse.
Conclusion
A merger is a highly complex legal process requiring comprehensive corporate, tax, antitrust, and employment law review and implementation. Careful legal planning and coordination among all participants is essential for a legally secure and successful merger. In every case, the specific statutory and contractual provisions, the rights of those involved, and the requirements of the competent authorities must be observed.
Frequently Asked Questions
What legal requirements must be observed when merging two companies?
When implementing a business combination (merger), a multitude of legal requirements must be observed. Initially, the relevant corporate law applies, such as the Transformation Act (UmwG) in Germany, which regulates the requirements and procedures for mergers, demergers, or changes of legal form. Formal procedures must be followed, including the preparation of a merger agreement, review by auditors (merger auditors), and notarial certification. The participating companies must also observe certain deadlines and provide comprehensive information and involvement to their shareholders and employees (rights to information, consultation, and, if applicable, co-determination). Depending on the structure of the merger, shareholder or partner resolutions with qualified majorities may need to be obtained, and entries in the registers may have to be made. In addition to company law, labor law, tax law, and, where applicable, merger control regulations play a significant role, especially if antitrust thresholds are met.
What role does antitrust law play in mergers?
Antitrust law serves primarily to protect competition and reviews whether a business combination could have anti-competitive effects, such as the creation of dominant market positions. Under German law, the Act against Restraints of Competition (GWB) is particularly relevant, while at the European level, the EU Merger Regulation applies. Before executing a merger, the participating companies must therefore check whether, based on turnover and market share thresholds, they must notify the competent competition authorities— in Germany the Federal Cartel Office, on the European level the European Commission—and obtain approval. The authorities may prohibit such combinations or approve them only subject to conditions. Compliance with antitrust requirements is mandatory, since violations can result in significant fines and even the invalidity of the merger.
What co-determination rights do employees have in a business combination?
Employee rights play a central role in mergers. Under German law, the information and consultation rights of works councils under the Works Constitution Act (BetrVG) must be observed. In addition, on a European-wide basis, Directive 2001/23/EC (transfer of undertakings) and the Co-Determination Act may be relevant. It is often necessary to establish a European Works Council or even a co-determination agreement in the affected companies, particularly if the combination is cross-border. If personnel measures such as dismissals or transfers occur as part of the merger, the general rules on dismissal and employee protection continue to apply. It is important to note that employee representatives may have a right of approval or may demand renegotiation of certain working conditions where applicable.
What tax aspects are relevant in mergers?
Complex tax regulations have a decisive impact on the economic outcome of a merger. In particular, corporate tax law, the Transformation Tax Act, and where relevant, international double taxation agreements must be considered. For any type of merger, demerger, or contribution, it must be assessed whether tax book values can be carried over or whether hidden reserves must be disclosed, which may lead to immediate tax charges. In addition, effects on loss carryforwards, land transfer tax, and possibly VAT must be examined. The tax structuring of a merger therefore requires comprehensive planning and should be carried out early with the involvement of tax advisors.
What liability risks exist for managing directors in the context of a merger?
Managing directors are obliged, in the context of a merger, to act with due care and comply with all legal and contractual requirements. Breaches of these duties can result in personal liability, for example, if laws are not adhered to or the economic impacts of the merger were not sufficiently analyzed (Business Judgement Rule). In addition, they are liable for false or incomplete information provided to authorities, creditors, or shareholders. Significant liability risks especially arise from errors in fulfilling information obligations or in failing to file for insolvency in case of crisis. Thorough risk analyses, legal due diligence, and close accompaniment by legal experts are therefore advisable.
What approvals are required to implement a merger?
The execution of a merger generally requires the approval of the general or shareholders’ meetings of the companies involved. Certain majorities are necessary, typically a qualified majority of three-quarters of the represented capital—this may vary depending on the legal form and articles of association. Frequently, approval by the supervisory board, works council, or other internal bodies is also required. Particularly in regulated industries, additional regulatory approvals (e.g., by BaFin for banks and insurance companies) or possibly the consent of external lenders must be obtained, if financing agreements contain relevant clauses.
How are the interests of minority shareholders protected in a merger?
Transformation law provides various protective mechanisms for minority shareholders. Key rights include the right to receive cash compensation or to challenge the merger resolution (action for annulment). In some cases, special quorums or particular approval requirements exist to protect minority investors from one-sided decisions. In addition, extensive information obligations and, if necessary, the involvement of an expert auditor are provided for. In the case of listed companies, takeover law also applies, which may require a mandatory offer to minority shareholders in certain circumstances.
