EU CROSS-BORDER MERGERS
A. WHY STRUCTURE A CROSS-BORDER MERGER
Some of the reasons behind cross-border mergers are as follows:
- The EU merger directive which facilitates merger and acquisition activity, encouraging competition and co-operation and strengthening the single market.
- A merger combined with transfer of the seat of the company (re-domiciliation of registered office to Cyprus) may prove most beneficial for restructuring.
- On completion of the merger transfer of assets and liabilities from dissolving company to surviving company is automatic.
- Avoiding the complications of liquidation e.g. delay, expenses, legal procedures, publicity, documentation.
- Reduction of legal entities in the group.
- Expansion of business within EU without the need of forming a European company.
B. WHY CYPRUS
There are significant tax benefits especially if the surviving company is the Cyprus Company including i.e.
- Corporate tax is 12.5% the lowest tax within the EU (including interest income).
- No tax on incoming and outgoing dividends.
- No capital gains tax.
- A substantial network of Treaties for Double Tax Avoidance.
- Merger directive provisions allows relief in the form of exemptions from Cyprus taxes
(corporate tax, capital gains tax, stamp duty, special defense fund) which do not apply in case of liquidations.
- Deferred Taxation of profits and capital gains during re-organizations subject to specific conditions. Use of tax losses subject to conditions. Accumulated carried forward Cyprus Tax losses generated by the target company are transferred along with the company.
- Cross border mergers come outside the scope of VAT legislation.
C. ENGAGEMENT OF COUNSEL –COURT PROCESS
Our engagement for consulting takes place at the very initial stage to express an opinion or address and clarify various issues, outline the process and requirements, work on the drafting of the ‘’common terms of the cross border merger” (the ‘’merger plan’’) and in general oversee the preparation of all relevant documents required.
- Court process
Part of the process for a cross boarder merger is the filing of a by summons application in the District Court where the registered office of the Cyprus company is situated supported by an affidavit (normally sworn by one of the directors of the company. The Court is called upon to scrutinize the legality of the cross border merger as regards the part of the procedure which concerns the merging company which is subject to Cyprus law and by means of a court order to issue a certificate (pre-merger certificate) conclusively attesting to the proper completion of the merger procedure.
Further in case Cyprus is the EU member country in which the surviving company is registered the court will be called upon to scrutinize the legality of the cross border merger as regards that part or the remaining part of the procedure which concerns the completion of the cross border merger.In the affidavit in support of the application to the court mentioned above the following documents should also be attached in the form of exhibits i.e.
- Registrar’s official certificates of incorporation, directors and secretary, shareholders, registered office and memorandum and articles of association of the company.
- Merger plan prepared jointly by the directors of the dissolving and surviving company with minutes of the board approving the merger plan.
- Proof of filing the merger plan with the Cyprus Registrar of Companies.
- Prescribed particulars of the merging companies.
- Report of the management on the merger.
- Independent expert report on the merger.
- Approval by the general meeting.
In the above affidavit specific reference must be made on the issues concerning minority shareholders, creditors and employees.
D. LEGAL FRAMEWORK AND OUTLINE OF THE PROCEDURE
- Legal Framework
The cross border merger directive (Directive 2005 /56 /EC of the European Parliament and the Council of 26/10/2005) facilitates the cross border mergers of limited liability companies by harmonizing rules and provides for the procedure to be followed. In Cyprus the Cyprus Company Law (Cap 113} regulates cross board mergers. Cap 113 sets out the requirements and procedures in line with the above directive.
- Outline of the procedure
- Eligibility of mergers
A company which is registered in Cyprus can participate in a cross-border merger with the exception of limited liability companies by guarantee and companies under liquidation. A cross-border merger is the merger of limited liability companies which have been incorporated in member states within the Community or within the European Economic Area, provided that at least two of such companies are governed by the law of different member states. There are three (3) possible ways in which a cross-border merger can take place:
By absorption when one or more companies are being dissolved without going into liquidation and during their dissolution all their assets and liabilities are transferred in another pre-existing company, the absorbing company;
By incorporation, when two or more companies are being dissolved without going into liquidation and during their dissolution they transfer all their assets and liabilities to a new company which they incorporate;
By acquisition, when a company is dissolved without going into liquidation and during its dissolution it transfers all its assets and liabilities to the company holding all the securities or shares representing its capital. Once you decide to proceed with a cross border merger in any one of the above three ways and the resulting company is a Cyprus company, the procedure described below must be followed which includes:
Drawing up and submission of the common terms of the cross border merger
Approval by the general meeting. Issue of a pre-merger certificate. Filing of the court order approving the completion of the cross border merger
- Drafting and submission of the common terms of the cross border merger (merger plan)
The first step to initiate the cross border merger procedure between companies is the drawing up of the common draft terms of cross border merger prepared by the Directors of the Cyprus company taking part in the cross border merger and by the competent management body of the company which is registered in any member state of the Community (or in the European Economic Area) and takes part in the cross border merger.
The common draft terms of the cross border merger is submitted to the Registrar of Companies at least one (1) month prior to the date the general meeting is convened for their approval in the Greek language or
certified translation of the common terms, either by an affidavit or by sworn translator of the Republic of Cyprus, in case the terms are in a language other than Greek.
If the Registrar of Companies is satisfied that all legal requirements, depending on the case, have been met, it shall proceed with the registration of the common draft terms of the cross border merger, the updating of the companies register, as well as the publication of the common draft terms of the cross border merger and the specified required particulars of the merging company in the Cyprus Government Gazette.
- Approval by the general meeting and issue of a pre-merger certificate
Concurrent with the submission of the common terms at the Registrar of Companies, each of the merging companies draws up a directors’ report and an independent expert’s report, which are made available not less than one (1) month before the date of the general meeting where the cross border merger shall be approved.
Provided that the draft terms of the cross border merger are approved at the general meeting of the merging Cyprus Company then the Cyprus Company applies to the District Court where its registered office is located, for approval of the procedure to this stage and the issue of a pre-merger certificate.
At the same time, the merging company which is incorporated in member states within the Community or within the European Economic Area must secure a pre-merger certificate in the manner provided in the said member state.
Further, once the said pre-merger certificates are received, the Cyprus surviving company submits an application to the District Court where the company’s registered office is located, requesting the issue of a court order approving the completion of the cross border merger.
- Filing of the court order approving the completion of the cross board merger
Once the court order approving the completion of the cross border merger is issued, the Cyprus Company must file with the Registrar of Companies the said court order
The court order must be accompanied by:
The announcement ( publication in the Gazette ) of the cross border merger (with reference to its completion), in the Greek language and receipt for payment of the prescribed fees.
It is noted that, in the case where the completion of a cross border merger results to the incorporation of a new company in the Republic of Cyprus, the process of incorporating a Company must also be followed and a copy of the court order must be attached with the new company’s memorandum of association.
Following the completion of the filing of the court order the Registrar of Companies shall proceed:
To publish the notification of completion of the cross border merger in the Cyprus Government Gazette.
To issue a certificate of merger, in the case of a cross border merger by incorporation or a certified memorandum and articles of association along with the court order, in the case of a cross border merger by absorption or by acquisition.
To notify the competent authorities of the countries involved for the completion of the cross border merger.
- Eligibility of mergers