Luxembourg Corporate - Cross Border Mergers

Introduction

Luxembourg has a longstanding legislative policy to support its position as a leading global domicile for investment structuring. Applying this policy in a corporate context, Luxembourg has implemented the various European Union (EU) merger directives in a characteristically open-market fashion. The EU merger directives require EU member states to legislate in their national laws to enable cross-border mergers, on a tax neutral basis, between public companies constituted in EU member states.

In line with its role as a global finance centre enjoying full EU single-market access, Luxembourg has transposed these directives into its national law in an enhanced manner so that cross-border mergers are available (a) in relation to any Luxembourg company or limited partnership with legal personality, not being restricted to public limited companies only and (b) in relation to any cross-border merger, not restricted to EU companies only, provided that (i) the legal system of the foreign jurisdiction concerned does not prohibit such merger and (ii) the relevant foreign company complies with the applicable provisions and formalities of its national law. In this briefing the English term "company" refers to the Luxembourg "société" and should therefore be read as including Luxembourg limited partnerships for these purposes.

Mergers - legal effects

The most common way to carry out a cross-border merger involving a Luxembourg company results in the merger by acquisition of one or more companies (Absorbed Company(ies)) by another (the Acquiring Company).

Merger by acquisition results in the Absorbed Company being dissolved without going into liquidation and the general transfer all of its assets and liabilities by operation of law to the Acquiring Company in exchange for the issue of securities by the Acquiring Company (which may be supplemented by a limited cash payment) to the former members of the Absorbed Company. The members of the Absorbed Company must meet any eligibility criteria that may apply to membership of the Acquiring Company.

The generally applicable principle is that such transfer of assets and liabilities occurs automatically, by operation of law on the completion of the merger process, without need for further agreement or act. The public notification of the merger being considered to constitute the notice generally required for assignment of assets under the Civil Code.

This is however subject to any applicable specific registration requirements in respect of certain real property, proprietary security, industrial and intellectual property rights, which formalities may be met within 6 months following the merger's effective date. If the property transferred includes shares in third party companies whose transfer is subject to specific requirements, those requirements must also be met.

In relation to obligations and/or liabilities, again the general principle is that they transfer automatically on the merger, by operation of law, to the Acquiring Company, without need for any additional consent to such novation of obligor from the creditors. This general rule is however subject to certain exceptions, the rule does not override any contractual provisions expressly prohibiting such transfer.

Special attention should also need to be paid to any guarantees previously issued by third parties in respect of the obligations of the Absorbed Company which will need to expressly extend (or be extended) to cover unperformed obligations passed to the Acquiring Company, post-merger.

Simultaneously, the members of the Absorbed Company become members of the Acquiring Company and the Absorbed Company ceases to exist by way of automatic dissolution without liquidation. Where the Absorbed Company is a Luxembourg company, it will be deregistered from the Luxembourg Trade and Companies Register further to its merger by acquisition.

Unless otherwise varied by the terms of merger, the offices of the directors (and auditor, if applicable) of the Acquiring Company will continue, unaffected by the merger. In contrast, the dissolution (without liquidation) of the Absorbed Company will automatically terminate the offices of the directors (and auditor, if applicable) of that company.

An alternative to merger by acquisition involves two existing companies merging into a single, newly constituted, successor company. This has equivalent legal effect to a merger by acquisition with the new, successor company taking the place of the Acquiring Company. Known as merger by incorporation, this route is less frequently used in practice.

Economic rationales

The most obvious economic rationale for a cross-border merger is to combine two businesses in a single legal entity with a view to...