FAQs: Cross-border merger of limited liability companies 2023 – Part 1, 2 & 3

Krista Pisani Bencini and Sarah Fenech are both Senior Associates at Fenech & Fenech Advocates

These FAQs are the first in a series of FAQs addressing the scope and application of the Cross-Border Mergers of Limited Liability Companies Regulations 2023 (Subsidiary Legislation 386.28), which came into effect as from 31 January 2023 (the “2023 CBM Regulations”) following the repeal of the 2007 regulations previously governing cross-border mergers (Subsidiary Legislation 386.12). This first part introduces the 2023 CBM Regulations and delves into the characteristics of a cross-border merger as regulated thereunder.

What is the purpose of the 2023 CBM Regulations?

The CBM Regulations transpose and implement Directive 2019/2121/EU of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/ 1132 as regards cross-border conversions, mergers and divisions. This Directive, known as the “Mobility Directive”, is essentially targeted at improving the freedom of establishment and cross-border movement of companies. While various changes related to divisions and conversions, the mergers regime was also impacted considerably. An increased focus on the protection of employees, creditors and minority shareholders is evident, as is the effort to have more simplified mergers in certain cases.

The idea behind the Mobility Directive is to remove confines between EU jurisdictions and to ease and simplify movement between one jurisdiction and another.

What qualifies as a cross-border merger under the 2023 CBM Regulations?

The 2023 CBM Regulations are targeted at mergers between a Maltese company and another entity in an approved jurisdiction. While very similar to its predecessor, the new regime has expanded to capture the cross-border merger of companies coming from an approved jurisdiction outside the EU/EEA. The decision, at a national level, to extend the purview of the 2023 CBM Regulations in such manner, is a noteworthy change, taken, one assumes, with economic reasons in mind.

The 2023 CBM Regulations cater for four (as opposed to previously three) types of cross-border mergers:

1. Merger by acquisition – whereby 1 or more companies being acquired will be dissolved without going into liquidation and as a result of the merger, transfer all their assets and liabilities to the acquiring company which is already in existence. The consideration for this transfer is the issue to the members of the company or companies being acquired, of securities or shares representing the capital of the acquiring company. In addition, a cash payment of not more than 10% of the nominal value (or the accounting par value, as applicable) of those securities or shares, may also be made;
2. Merger by formation – whereby the merging companies involved will both be dissolved as a result of the merger, without either company surviving as it were. Rather, all the assets and liabilities of the merging companies are transferred to a new company altogether which they form for the purposes of the merger. In this case, the members of the merging companies will be issued securities or shares representing the capital of the new company and, if applicable, a cash payment not exceeding 10% of the nominal value (or the accounting par value, as applicable) of those securities or shares;
3. Merger by absorption between a parent company (Company A) and its wholly owned subsidiary (Company B) – whereby merging Company B (the fully owned subsidiary), on being dissolved without going into liquidation, transfers all its assets and liabilities to Company A (its direct parent) in a typical upstream merger scenario; and
4. Merger by acquisition between companies having the same ownership without the issue of new shares – this is a new type of merger introduced by the 2023 CBM Regulations, which contemplates the scenario where 1 or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to the acquiring company, without the issue of new shares by the acquiring company. In order to avail of this type of merger, the merging companies must have the same ownership, and one of two conditions must subsist, namely:
5. one person must hold directly or indirectly all the shares in the merging companies; or
6. the members of the merging companies must hold their securities and shares in the same proportion in all merging companies.

What is the reason behind the introduction of the fourth type of merger under the 2023 CBM Regulations?

The fourth merger scenario was introduced in order in order to address certain limitations in the existing legal framework for cross-border mergers, by specifically catering for mergers between companies which are not wholly owned by a single entity but which have the same ultimate beneficial owner or whose members have identical proportional ownership.

In keeping with the spirit of the Mobility Directive to streamline processes as much as possible, this new merger simplifies the merger process whenever there is common ownership of the merging companies. The simplification not only lies in the fact that there is no issue and allotment of shares required, but also because this merger scenario allows the merging companies to avail of the simplified merger procedures under the 2023 CBM Regulations.

A detailed consideration of the simplified procedures will be provided by means of a separate set of FAQs.  

How is a cross-border merger different to a company re-domiciliation or liquidation?

A cross-border merger, a company re-domiciliation, and a liquidation are distinct legal processes serving different purposes and governed by different legal frameworks.

A chief distinction is that in a cross-border merger although the merging companies are being dissolved, there is no liquidation as such – Hence the merging companies’ assets and liabilities will not be dispersed as would be the case in a liquidation, but they will instead blend with those of the entity being merged with, such that the acquiring company will become the new legal owner of the company resulting from the merger.

Similarly, the company being acquired in a cross-border merger (whose assets and liabilities are being transferred to the company resulting from the merger) will not be deemed to continue its existence in the jurisdiction of the latter company – but would cease to exist as a separate entity altogether by reason of the fact that it has forged with the company resulting from the merger.

PART 2

These FAQs are the second in a series of FAQs addressing the scope and application of the Cross-Border Mergers of Limited Liability Companies Regulations 2023 (Subsidiary Legislation 386.28), which came into effect as from 31 January 2023 (the “2023 CBM Regulations”) following the repeal of the 2007 regulations previously governing cross-border mergers (Subsidiary Legislation 386.12, the “repealed CBM Regulations”).

Part 1 of the FAQs introduced the 2023 CBM Regulations, whereas this Part 2 focuses on the applicability of the 2023 CBM Regulations while highlighting the main changes brought about by the 2023 CBM Regulations.

When and to whom do the 2023 CBM Regulations apply?

The applicability remit of the 2023 CBM Regulations is set out in Regulation 4 of the 2023 CBM Regulations – a lengthy provision containing various permutations and provisos. In a nutshell, the 2023 CBM Regulations apply to cross-border mergers involving:

1. Limited liability companies established in an EU/EEA Member State and having their registered office, central administration or principal place of business within an EU / EEA Member State, provided that:
   1. at least 2 of such companies are regulated by the laws of different EU/EEA Member States; and
   1. at least 1 of the merging companies, (or, in the case of a merger by formation, the company resulting from the merger) is registered in Malta; and

1. Limited liability companies established in any other approved country or jurisdiction provided that:
   1. at least 2 of such companies are governed by the laws of different approved countries or jurisdictions; and
   1. at least 1 of the merging companies, (or, in the case of a merger by formation, the company resulting from the merger) is registered in Malta;

Unlike the repealed CBM Regulations, therefore, the 2023 CBM Regulations now also regulate the cross-border merger of non-EU/EEA limited liability companies (provided that there is the Malta connection by having one of the  entities involved in the merger duly registered in Malta).

It should be further noted that:

the 2023 CBM Regulations also apply where the law of at least 1 of the jurisdictions involved in the merger, allows the relevant cash payment (referred to in the first two paragraphs of the definition of “merger” i.e. merger by acquisition and merger by formation, where a cash payment is involved) to exceed 10% of the nominal value (or the accounting par value, as applicable) of the securities or shares representing the capital of the recipient companies. – This is in line with the repealed CBM Regulations;

and

• the fact that the companies involved in a cross-border merger are subject to preventive restructuring frameworks, or, are the subject of crisis prevention measures (as defined in Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms) does not preclude them from benefitting from the provisions of the 2023 CBM Regulations.

When are the 2023 CBM Regulations deemed not to apply?

The 2023 CBM Regulations also provide for specific exclusions to their applicability.  They will, in fact, not apply to:

1. Cross-border mergers involving a company, the object of which is the collective investment of capital provided by the public, which operates on the principle of risk-spreading and the units of which are, at the holders’ request, repurchased or redeemed, directly or indirectly, out of the assets of that company;

1. A company that is subject to resolution tools, powers and mechanisms under Title IV of Directive 2014/59/EU (which, broadly speaking, establishes resolution options for credit institutions and investment firms)  or in Title V of Regulation (EU) 2021/23 (which, broadly speaking, establishes resolution options for central counterparties); and

1. A company that is the subject of either insolvency or liquidation proceedings.

Do the 2023 CBM Regulations provide any guidance as to the definition of “company”?

As part of the effort to reduce legal ambiguities and streamline the process for cross-border mergers, the 2023 CBM Regulations have, for the first time, explicitly defined the term “company”, as further set our below:

In the first instance:

1. a limited liability company formed in accordance with the Companies Act (Chapter 386 of the laws of Malta);
2. a limited liability company listed in Annex II (which lists different types of EU companies) of Directive 2017/1132/EU (which tackles aspects of company law across the EU); and
3. any body corporate formed and incorporated or registered under the laws of any other approved country or jurisdiction which is similar in nature to a company registered under Maltese law.

Also falling within this definition are companies with share capital and having legal personality, possessing separate assets which alone serve to cover their debts and that are subject, under the national law governing them, to conditions concerning guarantees such as are provided for by Directive 2017/1132/EU for the protection of the interests of members or others.

This clearer definition is all important especially considering the possibility for non-EU/EEA companies to be involved in the mergers which necessitated such a robust definition of the “company” involved.

Briefly, what are the most substantive changes introduced by the 2023 CBM Regulations when compared with the repealed CBM Regulations?

While the cross-border merger process does not radically depart from that governed under the repealed CBM Regulations, some significant amendments were made, namely the introduction of:

1. Cross-border mergers between Maltese companies and companies formed outside the EU/EEA and coming from an approved jurisdiction;
2. A new and fourth type of cross-border merger – essentially a merger by acquisition between companies having the same ownership without the issue of new shares;
3. Certain changes in and/or additions to the documentation required to be drawn up to complete the cross-border merger process (e.g. the introduction of the declaration of solvency);
4. New filing obligations; and
5. New timing considerations.

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PART 3 by Krista Pisani Bencini

These FAQs are the third part in a series of FAQs addressing the scope and application of the Cross-Border Mergers of Limited Liability Companies Regulations 2023 (Subsidiary Legislation 386.28), which came into effect as from 31 January 2023 (the “2023 CBM Regulations”) following the repeal of the 2007 regulations previously governing cross-border mergers (Subsidiary Legislation 386.12).

Part 2 of the FAQs focused on the applicability of the 2023 CBM Regulations while highlighting the main changes brought about by the 2023 CBM Regulations. This Part 3 outlines the main drafting aspects to be considered during a cross-border merger of companies under the 2023 CBM Regulations.

What documentation is required for a cross-border merger under the 2023 CBM regulations?

A number of documents must be prepared in the course of a cross-border merger, namely:

• The Common Draft Terms of Merger (the “CDTs”): This is undoubtedly the most important document of the merger as it sets out the terms upon which the merger will take place. Regulation 6 of the 2023 CBM Regulations lists the particulars which need to be included in this document and the Registrar will vet the CDTs to ensure that all such details are indeed included. A pre-vetting before submission is often recommended. It is the responsibility of the directors to draw up this document and to then have it signed by 1 director (where there is a sole director) or by 2 (where there are 2 or more directors).

• Legal Opinion: This document was an introduction of the 2023 CBM Regulations, to cater for the new possibility for one of the merging companies or the company resulting from the merger not being registered in an EU/EEA State. The purpose of this document is to confirm that the proposed cross-border merger is allowed by the laws of the relevant jurisdiction. When required, this must be attached to the CDTs.

• Directors’ Report: This report must be drawn up by the board of directors of the Maltese merging company/s and is targeted at members and employees. The report must include the details set out in Regulation 7 of the 2023 CBM Regulations and is aimed at outlining the legal and economic aspects of the cross-border merger, as well as the manner in which the cross‐border merger will impact employees and the company’s future business post-merger. The report should either include two sections (one for members and one for employees) or could take the form of two distinct reports. In either case, the details set out in Regulation 7 need to be adhered to. There are instances where the law specifies that this Report or part of its is not required, such as when the simplified formalities apply.

• Declaration of Solvency: This declaration is also a new addition in the 2023 CBM Regulations. The purpose is for the directors (of a Maltese merging company) to declare that they are not aware of any reason the company resulting from the merger “is not in a position to meet liabilities when those liabilities fall due”. This declaration is not required when the Maltese merging company is subject to preventive restricting frameworks or is the subject of crisis prevention measures as defined in point (101) of Article 2(1) of Directive 2014/59/EU or in point (48) of Article 2 of Regulation (EU) 2021/23. Directors must make this declaration within the periods specified at law and must include a statement of assets and liabilities made up to a date not earlier than one month before the filings with the Registrar in terms of Regulation 10.

• Independent Expert’s Report: The Maltese merging company must also appoint an expert, independent of it, to review the CDTs. The expert must then draw up a report targeted at the company’s members. The Report must include the details set out in Regulation 9 and must include, amongst other matters, the expert’s view as to the adequacy of the cash compensation and the share exchange ratio. The report must be available not less than one month before the date of the general meeting approving the merger. This report will not be required, if all the members of each of the companies involved in the cross-border merger have so agreed or if the Maltese merging company is a single member company.

• Notice: Members, creditors and employees (or their representatives) of the Maltese merging company must be made aware (by means of a notice) that they may submit their comments on the CDTs, at the latest five (5) working days before the date of the general meeting (either of the Maltese merging company or, where the GM is not required, of the other merging company/a).

Should practitioners consider any additional drafting requirements?

While the above documents are the main documents required in the context of a cross-border merger, practitioners must also consider the following:

• The General Meeting: Although there are instances when this is not required, as a rule, the CDTs must be approved by an extraordinary resolution of the Maltese merging company in general meeting, after the Directors’ Report and Experts’ Report, amongst others, are considered. While this is not a document per se, it does give rise to the need to, either prepare notices and agendas required for calling such a meeting, take minutes or else, if the resolution in writing is preferred and allowed, draft the written resolution as required. If the statutes of the Maltese merging company need to be amended as a result of the merger, the amendment needs to be drafted and should also be approved by means of this resolution. Within fourteen days of the approval, the officers of the company must deliver the extraordinary resolution approving the merger to the Malta Business Registry (the “MBR”).

• The Pre-Merger Certificate Application: This Application, to be made by the Board, can be found online on the MBR’s website https://mbr.mt/promo/official-registry-forms/. The application must be signed by at least two directors of the Maltese merging company (unless there is only one director in office) and may be submitted online. The documents in Regulation 17(2), including the CDTs and declaration of solvency, must be attached to this form. Where any shares are pledged, the written consent of the pledgee must also be attached. In the case of a licensed Maltese merging company, the consent of the relevant competent authority must be appended to the application. Similarly, for public companies, quoted on a recognised investment exchange, proof of the consent (to the cross-border merger) of the listing authority in Malta must be attached to the application. The application must be submitted to the Registrar upon the lapse of one month from the last publication following the registration of the extraordinary resolution approving the merger, or, in the cases where this approval is not applicable, from the publication of the CDTs in terms of Regulation 10.

• Other documents: Practitioners, advising the company, the shareholders, or any interested party, may get involved with drafting Court related documents in the context of a cross-border merger, depending on whether any applications shall be filed in court in line withthe 2023 CBM Regulations. Shareholders are in fact given the right to dissent to the merger or to redeem their shares or even contest the share-exchange ratio or the cash compensation in court. Additionally, any interested party may, in terms of Regulation 15, also contest the publication of the CDTs (in terms of Regulation 10) or that of the general meeting (in terms of Regulation 14), while any creditor whose debt existed before the publication of the CDTs, may also apply to contest the adequacy of the safeguards to the creditors’ claims in the CDTs. All these scenarios will give rise to the need for drafting of certain legal documents and notifications by practitioners.

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Part 4 of these FAQs will delve into further detail on the main changes and/or new requirements affecting the procedure/ documents for the cross-border merger of companies in terms of the 2023 CBM Regulations.

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