Committee Reports > List of Committees > Joint > 1978 > Committee on the Secondary Legislation of the European Communities > Report No. 01 - Proposed Directive on Mergers

REPORT

Proposal Examined

1. The Joint Committee has examined the proposal of the Commission concerned with mergers of business undertakings viz:

Draft Third Directive on Company Law—Co-ordination of safeguards for the protection of members and others in connection with mergers between limited companies [R/131/73 as amended by R/69/76].

2. The draft Directive is one of a number of measures proposed or adopted in relation to company law which are intended to facilitate the exercise of the right of establishment by making the safeguards for the protection of the interests of members of companies and others equivalent throughout the Community as required by Article 54.3 (g) of the Treaty of Rome.

3. The proposal has been under consideration by a Council Working Group. The Joint Committee is informed that consideration of the proposal is well advanced and that it is likely to be ready for decision by the Council later this year.

Scope of Proposal

4. The draft Directive would require Member States to make provision in their national legislation for uniform rules governing certain types of mergers which are designed to protect the interests of shareholders, employees and creditors. It applies to two types of merger—merger by acquisition of the assets and liabilities of one existing company by another existing company, and merger by the formation of a new company and the acquisition by it of the assets and liabilities of several existing companies. The proposed Directive refers only to mergers where the dissolution, without liquidation, of the acquired company is involved and where the shareholders of the acquired company, by way of exchange for their shares in the company, receive shares in the acquiring company. If, in addition, a cash payment is involved, it shall not exceed 10% of the nominal value of the shares allotted. Under Articles 20 and 21, the draft Directive applies, with certain exceptions, to the situation in which all or some of the assets of a company are transferred to another company in return for shares in the acquiring company, the consideration passing to the members of the company as distinct from the company itself.

5. The proposed Directive refers only to mergers between companies in the same Member State, and is a prerequisite to the harmonisation of law on mergers across the frontiers of Member States, a matter which remains to be dealt with in a separate and subsequent Community measure entitled the Convention on International Mergers.

Implications for Ireland

6. The fusion type of merger whereby the acquired company is dissolved and its shareholders automatically become shareholders in the acquiring company or a new company is common on the Continent but very rare in Ireland. In the usual Irish type of merger the acquiring company obtains for cash, or share-exchange with cash adjustment, all of the shares or business of the company acquired. The proposed Directive does not deal with the latter type of merger nor does it apply to private companies. Consequently, its practical implications for Ireland are not significant. It is not unlikely that in due course the Commission will produce a draft Directive on Takeover Bids to cover the Irish type of merger.

7. Mergers by fusion when they do take place in Ireland are subject to the approval of the Court under section 203 of the Companies Act, 1963 and the provisions for the interests of affected parties are within the discretion of the Court. The proposed Directive, on the other hand, lays down a detailed procedure for safeguarding the various interests involved and, if it is adopted, amendment of the Irish legislation will be required.

Need for Flexibility

8. The proposed Directive would have a very limited application in Ireland and the Joint Committee does not object to its being adopted. The Joint Committee’s main concern is with the possibility of the Directive being taken as establishing principles which could be followed in the expected Takeover Directive. In general the Joint Committee would argue that while Article 54.3 (g) of the EEC Treaty requires equivalent safeguards throughout the Community, it does not require rigid uniformity. In the Joint Committee’s view Community Directives on company law should be as flexible as possible so that national laws would only have to be changed when safeguards of similar efficacy are clearly absent. It believes that it is important to ensure that mergers, which may well be in the public interest, are not frustrated by complex and rigid legal requirements. For example, it would question the value of the requirement in Article 5 of the proposed Directive whereby experts in reporting on the appropriate share exchange ratio are required to deal with “the relationship between the earnings yields of the companies, with future prospects taken into account”.

Employees’ Rights

9. Article 6 of the proposed Directive deals with safeguarding employees’ rights in the event of a merger by fusion. The Joint Committee accepts that it is most important that the rights of employees be adequately protected in merger situations. It has, however, been represented to it that no special provision is necessary in the proposed Directive in view of the fact that Directive 77/187 which was adopted by the Council on 14th February, 1977 is specifically directed towards safeguarding employees’ rights in such situations. It seems to the Joint Committee that there is considerable merit in this argument.

Acknowledgements

10. The Joint Committee wishes to thank the Confederation of Irish Industry and the Incorporated Law Society of Ireland for their invaluable assistance in the examination of this proposal.

(Signed) MARK CLINTON,

Chairman of the Joint Committee.

7th February, 1978.