Mergers & divisions

The Law of 23 March 2007 amended Luxembourg company law to implement the European company law and simplify the rules and conditions on mergers and divisions. This law allows a cross-border merger between any Luxembourg company with a legal personality, and companies governed by a European or foreign law if the national law of the relevant country agrees.

Entities with legal personalities are société anonyme, société en commandite par actions, société à responsabilité limitée, société en nom collectif, société en commandite simple, associations en participation, société coopérative, société civile, groupement d’intérêt économique.

Merger

A merger may take place where one or more companies or economic interest groupings that are absorbed or which shall cease to exist are the subject of bankruptcy proceedings, a scheme of arrangements with creditors or other similar procedure such as the suspension of payments, controlled management or a procedure implementing special management or supervision arrangements for one or more of these companies or economic interest groupings.

A merger is effected by the acquisition of one or more companies by another (merger by acquisition) or by the incorporation of a new company (merger by incorporation of a new company). The target companies of the merger are dissolved without liquidation and all assets and liabilities are transferred to the absorbing or newly created entity.

Division

The concept of a division was introduced to Luxembourg company law by the law of 7 September 1987, which enforced the European Economic Community (EEC) Sixth Directive (82/891/EEC, dated 17 December 1982).

According to Luxembourg company law, a division is defined as an operation in which a company (the company being divided), after its dissolution, but without going into liquidation, contributes its assets and liabilities to two or more pre-existing or newly formed companies (the recipient companies) in exchange for the issue of shares to shareholders.

A division can also occur when one or more of the companies or economic interest groupings that are acquired or will cease to exist are the subject of bankruptcy proceedings relating to litigations with creditors or a similar procedure, such as the suspension of payments, control of the management of the company or proceedings instituting special management, or supervision of one or more of such companies.

The law on commercial companies distinguishes between a division by absorption and a division by creation of one or more companies. In exchange, the shareholders receive shares.

Under a division by absorption, the company transfers, during its dissolution but without going into liquidation, all assets and liabilities to two or more pre-existing companies in exchange for the issue of shares to its previous shareholders. Under a division by creation of one or more new companies, the company transfers, during its dissolution without going into liquidation, all assets and liabilities to one or more newly-formed companies in exchange for the issue of shares to its previous shareholders.

A company being divided can, under company law, transfer all its assets and liabilities to two or more newly-formed or pre-existing companies. The partial division, where only parts of the company’s assets are transferred, qualifies as a capital reduction under company law.

Procedural steps for cross-border merger

Directive 2005/56/EC sets out 12 items to be included in the written common draft terms of cross-border mergers that involve Luxembourg limited liability companies, which must be established by the management of the merging companies. They include the same basic principles required in the common draft terms for mergers of Luxembourg companies, and additional information for cross-border mergers and mergers resulting in the creation of a European company (EC).

The common draft terms of mergers must be published in the relevant national gazette at least one month before the general meeting of shareholders of the merging companies, convened to approve of the merger. The managements of the merging companies must draw up a report explaining the economic and legal aspects of the merger, and the impact on shareholders, employees, and creditors.

For cross-border mergers, this report is to be made available at least one month before the general meeting of shareholders of the merging companies. In the absence of unanimous approval of the merger by the shareholders of both companies an independent expert appointed by the management of the merging companies must prepare a report on the proposed merger.

The expert’s and management’s reports inform the decision of the general meetings of the merging companies on the proposed merger, which must be approved with the same quorums and majorities required for amending the company’s articles. The independent expert's report and relevant documents are only necessary if they are required by the national law of the absorbed or absorbing company, and if the absorbing company holds 90 percent or more, but not all the shares and securities that confer rights to vote in the general meetings of the absorbed company.

Validity and effect of the merger

In Luxembourg, the notary is the national authority responsible for the verification of the legality of the merger, and in particular must ensure that the merger proposal has been agreed upon in the same terms by each merging company. The notary may be required to issue a certificate attesting to the legality of the above. The merger will be effective in relation to third parties as of the publication of the deed of the general meeting approving it or, if no such meeting is required, upon publication of the aforementioned notary's certificate.

Once merged, the absorbed company ceases to exist and its rights and obligations are transferred to the absorbing company. If the cross-border merger has taken place in accordance with the relevant laws, it cannot be declared null and void. For exceptions to this, see Article 21 of the Law, modifying Article 276 of the 1915 Law.