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:
- 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;
- 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;
- 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
- 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:
- one person must hold directly or indirectly all the shares in the merging companies; or
- 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 of these FAQs will delve into the applicability of the 2023 CBM Regulations and briefly introduce the main changes thereto.
