Cross-border mergers Directive approved by EU Council

The Commission proposed the draft Directive on cross-border mergers in November last year, aiming to create a new legal framework that would allow companies from one Member State to engage more easily and with greater certainty in cross-border mergers with companies from other Member States.

At present there are no specific procedures under EU law for cross-border mergers. This can lead to long delays for mergers as arrangements are worked out on an individual basis or by dual listing arrangements and take-overs, involving companies in complex and costly legal arrangements.

The Directive, says the Commission, will particularly help small and medium sized companies that wish to operate in more than one Member State, but not throughout Europe, and cannot therefore seek incorporation under the European Company Statute, which came into force in October.

The draft approved by the Council covers all limited liability companies except undertakings for collective investment in transferable securities (UCITS, or mutual funds). Given the very diverse types of cooperatives in the EU, Member States may exclude them from taking part in cross-border mergers, says the Commission.

In general, mergers will be governed in each Member State by the principles and rules applicable to their "domestic" mergers.

One of the main issues at stake in the Council discussions was the provision on employee participation. Member States have widely differing worker participation (co-determination) systems. This raised the question of how to deal with cross-border mergers that could lead to a loss or a reduction of employee participation.

According to the Commission, the compromise provisions approved by the Council mean that employee participation companies created under the Directive will be subject to negotiations based on the model of the European Company Statute.

Under that model, a special negotiating body will be established to aid in reaching agreement on participation arrangements. In the case of failure, standard rules on employee involvement would apply, stipulating that the higher standard of workers participation existing among the merging companies will apply to the merged entity if at least one third of the total number of employees before the merger were covered by a workers' participation scheme.

The European Parliament must approve the draft before it can become law. This, says the Commission, is likely to take place in early 2005.