New trends in cross-border mergers

Transcription

1 New trends in cross-border mergers Breakfast seminar, 15 January 2009 Michael Loy Consultant & Affiliate Professor HEC Paris Mergers & Acquisitions department Grégory Olczak-Godefert Senior Associate Employment & Benefits department PA: Estelle Dion Counsel Tax department

2 Introduction (1/2) An evolving matter over the last 20 years and for many years to come So, why have we organised this seminar? 2

3 Introduction (2/2) Plan Which issues are raised by cross-border mergers and how should they be addressed from the perspective of: I. A corporate lawyer II. An employment lawyer III. A tax lawyer 3

4 I. The corporate lawyer perspective 4

5 I. The corporate lawyer perspective Plan (1/1) Basic distinction for a French company involved in a cross-border merger: A. Merging with a foreign non-eu company B. Merging with a foreign EU company 5

6 I. The corporate lawyer perspective A. Cross-border merger between a French company and a foreign non-eu company (1/3) French corporate law is silent with respect to such mergers In practice, such mergers are rare and limited to intra-group reorganisations, where the parent company owns 100% of the share capital of its French subsidiary 6

7 I. The corporate lawyer perspective A. Cross-border merger between a French company and a foreign non-eu company (2/3) Why are such mergers rare in practice? By definition, they involve at least two legal systems which may be very different and do not apply the same legal concepts Where the French company is the target company, unanimity of the shareholders of the French company is required The provisions which are common to each of the legal systems involved (for example, the merger treaty) will apply on a cumulative basis, whereas for matters which are limited to one legal system (for example, corporate authorisations and formalities) only the provisions of this system will apply 7

8 I. The corporate lawyer perspective A. Cross-border merger between a French company and a foreign non-eu company (3/3) Where the French subsidiary merges with its foreign parent company, use of either: The simplified merger method (fusion simplifiée) subject to Article L of the French Commercial Code; or The blending of assets and liabilities method (dissolution-confusion) subject to Article , 3rd paragraph of the French Civil Code Beyond legal issues, there are practical issues to bear in mind before implementing such a merger 8

9 I. The corporate lawyer perspective B. Cross-border merger between a French company and a foreign EU company (1/5) In the wake of the implementation under French law of European texts, French law has enacted specific legal provisions governing cross-border mergers involving French companies These European texts are: The Regulation and the Directive of 8 October 2001 regarding the European Company (Societas Europaea, SE) The Directive of 26 October 2005 regarding Cross-Border Mergers 9

10 I. The corporate lawyer perspective B. Cross-border merger between a French company and a foreign EU company (2/5) The SE: One way to incorporate an SE is through a cross-border merger In France, the Scor Global P&C and Scor Global Life precedents What are the benefits of implementing a cross-border merger through the incorporation of an SE? Shareholders meeting: national rules applicable Supra-national rules (for example, the merger treaty) What are the weaknesses of the SE route? 10

11 I. The corporate lawyer perspective B. Cross-border merger between a French company and a foreign EU company (3/5) The Cross-Border Mergers Directive and its implementation under French law through the enactment of French-specific provisions regarding cross-border mergers: Law of 3 July 2008: articles L to L of the French Commercial Code Decree of 5 January 2009: articles R to R of the French Commercial Code 11

12 I. The corporate lawyer perspective B. Cross-border merger between a French company and a foreign EU company (4/5) Scope of the new French-specific provisions regarding cross-border mergers: Which type of transaction? Included: mergers by absorption or by setting-up a new company and simplified mergers Excluded: blending of assets and liabilities, demergers and partial contributions of assets Which type of company? French SA, SCA, SAS, SARL and SE With one or more companies registered in one or more Member States and of equivalent legal forms 12

13 I. The corporate lawyer perspective B. Cross-border merger between a French company and a foreign EU company (5/5) What are the new rules enacted by the French-specific provisions regarding cross-border mergers? Merger treaty Pre-merger statement and legality certificate Effective date Independent expert report Adjustment payment (soulte) Re-examination of the exchange ratio or indemnification of the minority shareholders 13

14 II. The employment lawyer perspective 14

15 II. The employment lawyer perspective Introduction (1/1) Lengthy negotiations for Directive on cross-border mergers in respect of participation of employees Framework provided in Directive concerning the European Company (SE) Protect employees rights concerning their involvement in decisions taken by the company Wide definition of involvement of employees: "any mechanism, including information, consultation and participation, through which employees' representatives may exercise an influence on decisions to be taken within the company." 15

16 II. The employment lawyer perspective A. Information and consultation of employees (1/3) Improved information for employees Draft terms of cross-border merger must include likely repercussions of the merger on employment Report prepared by management body must: include implications of cross-border merger for employees be made available to employee representatives (staff delegates, works council?) or to employees themselves 16

17 II. The employment lawyer perspective A. Information and consultation of employees (2/3) Reinforced obligation to consult employees Employee representatives (works council or staff representatives) must be consulted on cross-border merger project in accordance with French law Opinion of employee representatives is annexed to report prepared by management body 17

18 II. The employment lawyer perspective A. Information and consultation of employees (3/3) Points to note Different consultation procedures need to be coordinated properly: at level of each Member State between national and European level (where necessary) French works council may also need to be consulted on merger concentration 18

19 II. The employment lawyer perspective B. Employee participation general (1/2) Definition of participation "Participation means the influence of the body representative of the employees and/or the employee representatives in the affairs of a company by way of: the right to elect or appoint some of the members of the company's supervisory or administrative organ; or the right to recommend and/or oppose the appointment of some or all of the members of the company's supervisory or administrative organ." 19

20 II. The employment lawyer perspective B. Employee participation general (2/2) Law of 3 July 2008 provides for a simple rule... Company resulting from cross-border merger is not required to establish rules relating to employee participation if neither of companies was governed by participation rules prior to the merger...and complex exceptions If this is not the case, company is required to start the process to establish rules relating to employee participation 20

21 II. The employment lawyer perspective B. Employee participation possibilities (1/3) Scenario 1: Application of the French rules Agreement necessary? Employee participation established in accordance with provisions of French Commercial Code (appointment of directors or members of supervisory board elected by employees) 21

22 II. The employment lawyer perspective B. Employee participation possibilities (2/3) Scenario 2: Creation of a special negotiating body (SNB) If national law applicable to company resulting from cross-border merger does not provide for at least same level of employee participation as operated in merging companies If at least one of merging companies has, in the six months before publication of draft terms of crossborder merger, over 500 employees and operates an employee participation system 22

23 II. The employment lawyer perspective B. Employee participation possibilities (3/3) Scenario 3: Management body of merging companies choose to apply standard rules Standard rules concerning employee participation apply Standard rules concerning creation of representative body of company resulting from cross-border merger apply 23

24 II. The employment lawyer perspective B. Employee participation SNB (1/6) The SNB Negotiates with a view to reaching written agreement on arrangements for employee participation in company resulting from the merger A legal entity Must be set up as soon as possible after publication of the draft terms of cross-border merger and may continue for 6 months (may be extended by another 6 months) 24

25 II. The employment lawyer perspective B. Employee participation SNB (2/6) Purpose of the negotiations System and method of participation Number of members representing employees Procedures to follow Rights of members Possibility to negotiate creation of employee representative body of company resulting from the merger? 25

26 II. The employment lawyer perspective B. Employee participation SNB (3/6) Result of negotiations Option 1: agreement entered into concerning employee participation Absolute majority of its members representing absolute majority of employees required Votes of 2/3 of members representing at least 2/3 of employees, including votes of members representing employees employed in at least two Member States required if: 25% of employees of merging companies already benefit from participation rights; and agreement would reduce these rights 26

27 II. The employment lawyer perspective B. Employee participation SNB (4/6) Result of negotiations Option 1: agreement entered into concerning employee participation (cont) If different systems of employee participation exist in the merging companies, SNB must choose one of these methods SNB may decide to apply standard rules 27

28 II. The employment lawyer perspective B. Employee participation SNB (5/6) Result of negotiations Option 2: decision by SNB not to open or terminate negotiations Votes of 2/3 of members representing at least 2/3 of employees, including votes of members representing employees employed in at least two Member States Rules of participation in force in Member State in which the company resulting from cross-border merger has its registered office apply 28

29 II. The employment lawyer perspective B. Employee participation (6/6) Result of negotiations Option 3: no agreement Standard rules concerning employee participation apply Standard rules concerning creation of representative body of company resulting from cross-border merger apply 29

30 II. The employment lawyer perspective B. Employee participation standard rules (1/1) Standard rules If 1/3 of employees in merging companies is covered by a system of participation, or if SNB so decides: if only one system of participation exists, this will apply if several systems exist, SNB (if there is one) decides which will apply if no SNB, or SNB does not decide, management bodies choose system of employee participation Creation of employee representative body 30

31 II. The employment lawyer perspective B. Employee participation points to note (1/1) Specific points to note Company resulting from cross-border merger must take legal form that allows for exercise of employee participation where this is required Shareholders may agree that merger is conditional on their approval of arrangements for employee participation Participation rights established in company resulting from cross-border merger must be protected on any subsequent domestic mergers for further 3 years 31

32 III. The tax lawyer perspective 32

33 III. The tax lawyer perspective Plan (1/1) Since 1991, a favourable French corporate tax regime allowing a tax neutral treatment of qualifying mergers, demergers and partial business transfers (A). Since 2002, an enlarged definition of qualifying mergers and demergers covering operations involving non-french companies (B). Although prior approval from the French tax authorities is still need for most of cross-border transactions (C ). 33

34 III. The tax lawyer perspective A. Favourable French corporate tax regime (1/2) A favourable corporate tax regime available under French tax law and providing for: a roll-over of taxation of capital gains and profits realised upon the transfer of assets and liabilities, the exemption from taxation of capital gains recognised by the absorbing company upon cancellation of shares held in the absorbed company, and a roll-over of taxation of capital gains upon the exchange of shares for corporate and individual shareholders. 34

35 III. The tax lawyer perspective A. Favourable French corporate tax regime (2/2) Main conditions of application of the favourable regime at the level of the participating companies: Mergers, demergers and partial business transfers: no step-up in the tax basis of the assets transferred. Demergers and partial business transfers: transfer of autonomous and complete branch of activity (at least two in case of demerger), and undertaking to hold the shares received for at least three years. Formal requirements/undertakings to be mentioned when drafting the related documentation. 35

36 III. The tax lawyer perspective B. Qualifying operations (1/3) Since 2002, a definition of qualifying mergers and demergers focusing on the effects of such operations rather than on their legal aspects, which covers, subject to a geographical exclusion, mergers and demergers involving non-french companies. At shareholder s level, roll-over of taxation of capital gains upon the exchange of shares if the merger of demerger complies with the new definition of qualifying operations. 36

37 III. The tax lawyer perspective B. Qualifying operations (2/3) Qualifying mergers and demergers: transactions triggering the transfer of all assets and liabilities of one company, upon its dissolution without going into liquidation, in exchange for the attribution, to the shareholders of the absorbed or de-merging company, of shares in the absorbing or de-merged company (demerger), and possibly some cash without exceeding 10% of the par value of the attributed shares. 37

38 III. The tax lawyer perspective B. Qualifying operations (3/3) A geographical exclusion included in the definition of qualifying operations, which applies to mergers, demergers and partial business transfers. Where the transaction falls outside the scope of the 1990 EU merger directive and if any of the participating entities is resident in a country that has not entered into a tax treaty with France containing an administrative assistance clause providing for information exchange. Excluded countries: Switzerland (?), Saudi Arabia, Oman, Qatar, Bahrain, Bolivia, certain ex-ussr states. 38

39 III. The tax lawyer perspective C. Prior tax ruling needed for outbound transfers (1/4) In addition, a prior approval by the French tax authorities is still required in case of outbound transfers of assets and liabilities, i.e.: merger of a French company into a non-french company, demerger of a French company into non-french companies, or partial business transfer by a French company to a non- French company. 39

40 III. The tax lawyer perspective C. Prior tax ruling needed for outbound transfers (2/4) Under French tax law, such approval shall always be granted if: the operation is justified by economic reasons, the operation does not have as its main purpose fraud or tax avoidance, and the future taxation in France of any gains deferred remains possible (e.g. the foreign company needs to maintain a permanent establishment in France). However, the practice of the Ruling Department at the French tax authorities has become more stringent over the past few years 40

41 III. The tax lawyer perspective C. Prior tax ruling needed for outbound transfers (3/4) Recent precedent 1: merger of a French company (being an operating company) into its UK parent company using the blending of assets and liabilities method (dissolutionconfusion) Parent 100% Sub UK France Position of the Ruling Department (prior ruling needed): Application of the favourable French corporate tax regime subject to: (1) Parent maintaining a PE in France, and (2) PE keeping same assets and tax basis. Legal opinions required from UK counsel as to the local legal and tax treatment of the transaction (!). 41

42 III. The tax lawyer perspective C. Prior tax ruling needed for outbound transfers (4/4) Recent Precedent 2: contribution by a UK company with a permanent establishment in France (PE) of French Sub 1 to French Sub 2 (both being operating companies). UK France 100% Sub 1 Parent PE Sub 2 100% Contribution of shares Position of the Ruling Department Prior ruling needed, although the UK company, acting through its PE in France, should benefit from the same treatment than a French company (EU freedom of establishment!). Favourable corporate tax treatment applied subject to the shares newly issued by Sub2 to Parent (1) being held through the PE, (2) being kept for a 3 year period and (3) being allocated the same tax basis as the Sub1 shares. 42

43 III. The tax lawyer perspective Conclusion (1/2) Although a favourable corporate tax regime theoretically applicable to mergers, demergers and partial business transfers involving foreign companies, a certain number of difficulties arising from: the need to obtain a prior approval from the French tax authorities in many cases, and the positions taken by the Ruling Department. Expected consequences in terms of French taxation in relation with the enactment of French specific legal provisions aiming at facilitating cross-border mergers? 43

44 III. The tax lawyer perspective Conclusion (2/2) Practical use of provisions introduced in 2005 allowing a tax neutral treatment of outbound EU transfers of French companies registered office? Inbound transfers of registered office? Regulation to be issued by the French tax authorities? 44

45 Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.

46 New trends in cross-border mergers Breakfast seminar, 15 January 2009 Michael Loy Consultant & Affiliate Professor HEC Paris Mergers & Acquisitions department Grégory Olczak-Godefert Senior Associate Employment & Benefits department PA: Estelle Dion Counsel Tax department