Part 1: Cross-Border Mergers of Limited Liability Companies under Maltese Law

Part 1: Cross-Border Mergers of Limited Liability Companies under Maltese Law

The first part of this three-part series examines the scope and applicability of the CBM Regulations, as well as the documents that must be prepared and submitted for the purposes of a cross-border merger.

The Mobility Directive (Directive (EU) 2019/2121), which amended Directive (EU) 2017/1132, was implemented to create a harmonised and structured framework for cross-border mobility of companies.

Its purpose is to make it easier for companies to undergo conversion, mergers and divisions across borders, while also safeguarding key interests such as the rights of employees, creditors, and shareholders.

Malta implemented this Directive through three separate pieces of legislation:

1. Cross-border Divisions of Limited Liability Companies Regulations(S.L. 386.26);
2. Cross-border Conversions of Limited Liability Companies Regulations(S.L. 386.27);
3. Cross-border Mergers of Limited Liability Companies Regulations(S.L. 386.28).

In this article, focus is given on the Cross-border Mergers of Limited Liability Companies Regulations (the “CBM Regulations”), which came into force in 2023 and repealed the 2007 framework (S.L. 386.12).

THE CBM REGUALTIONS ALLOW FOR FOUR TYPES OF MERGERS:

1. Merger by acquisition

Whereby one company is dissolved without going into liquidation, and all its assets and liabilities are transferred to the acquiring company. The acquired company ceases to exist as a separate entity.

2. Merger by formation

Two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to an entirely new entity that they form. The original companies cease to exist as separate legal entities.

3. Merger by Absorption between a parent and its wholly-owned subsidiary

The subsidiary, on being dissolved without liquidation, transfers all its assets and liabilities to its parent company, which already holds all of its shares.

4. Merger by acquisition without the issue of new shares.

Whereby one or more companies transfer all their assets and liabilities to an acquiring company, without the issue of new shares, provided that either one person holds, directly or indirectly, all the shares in the merging companies or the shareholders  of the merging companies hold their securities and shares in the same proportion across all the merging companies.

APPLICABILITY OF THE CBM REGULATIONS

The applicability criteria is set out in Regulation 4 of the CBM Regualtions.

1. Limited liability companies established in EU/EEA country and having their registered office, central administration or principal place of business within the EU/EEA.

Whereby at least two companies must be regulated under the laws of different EU/EEA Member States and at least one of the merging companies, or the resulting company in the case of a merger by formation, must be registered in Malta.

2. Limited liability companies established in any other approved jurisdiction

Whereby at least two companies must be governed by the laws of different approved jurisdictions and at least one of the merging companies or the resulting company in the case of a merger by formation, must be registered in Malta.

For the first time, non-EU/EEA jurisdictions are able to enjoy the benefits of the CBM Regulations. This is a significant departure from the old 2007 regulations, which were limited to EU/EEA mergers.

It is also worth noting that companies subject to preventive restructuring frameworks or crisis-prevention measures are still eligible to make use of the CBM Regulations. However, companies that are undergoing insolvency or liquidation proceedings are excluded.

KEY DOCUMENTS TO BE DRAWN UP

1. Common Draft Terms of Merger (CDTs)

This is the cornerstone document of the merger. It is drawn up by the board of directors  of  the  Maltese  merging company and sets out the terms upon which the merger will take place.

The CDTs must be signed by at least one director (in the case of a sole director) or two directors (in other cases).

Regulation 6 of the CBM Regulations sets out the details which need to be included. In a nutshell, the CDTs must include:

• The legal form and name, and the location of each of the merging companies registered office, and the legal form and name proposed for the company resulting from the cross-border merger and the proposed location of its registered office;
• Details of the cash compensation offer for shareholders;
• Any safeguards  offered  to  creditors;
• Information on  the  evaluation  of  the  assets  and liabilities which are transferred to the company resulting from the cross-border merger;
• The likely  repercussions of  the  cross-border merger on employment.

Members, creditors, and employees (or their representatives) of the Maltese merging company must be notified that they have the right to submit comments on the CDTs, no later than five working days before the date of the general meeting approving the merger.

The Malta Business Registry (“MBR/Registrar”) will vet the CDTs to ensure that all necessary details are included.

2. Legal Opinion (if required)

If any merging company or the resulting company is incorporated or registered outside the EU/EEA, a legal opinion must be obtained from that jurisdiction confirming that the proposed cross-border merger is permissible under its laws. This must be attached to the CDTs.

3. Directors’ Report

The board of directors of each Maltese merging company must prepare a report addressing both members and employees explaining the legal and economic aspects of the cross‐border merger and an explanation of the implications for its employees.

The report may either contain two separate sections, one addressed to members and another to employees or be issued as two separate reports. In any case, the report/s must be signed by at least one director (in the case of a sole director) or two directors (in other cases).

The report must be made available not less than six weeks before the date of the general meeting.

Regulation 7 provide certain exemptions in this respect. For example, the members’ section is not required if the Maltese merging company is a single-member company or if all members have agreed to waive this requirement. Likewise, the employees’ section is not required where the Maltese merging company (and any of its subsidiaries) has no employees other than those who form part of the board or other administrative or management bodies.

If both the members’ section is waived or not required and the employees’ section is not required, then the Directors’ Report does not need to be prepared.

4. Declaration of Solvency

In accordance with Regulation 8, the directors of a Maltese merging company are required to declare that, on the basis of the information available to them at  the  date  of  the  declaration,  and  after  having  made reasonable enquiries, there is no reason why the resulting company from the merger would be unable to meet its liabilities as they fall due.

This declaration must be made within the month immediately preceding the filings with the Registrar and must also contains a statement of assets and liabilities drawn up to a date not earlier than one month before filing with the Registrar.

This requirement does not apply where the Maltese merging company is subject to preventive restructuring frameworks or crisis-prevention measures.

5. Independent Expert’s Report

The Maltese merging company must also appoint an independent expert, approved by the MBR, to review the CDTs.

The expert is required to prepare a report addressed to the company’s members, which must include the expert’s opinion as to whether the cash compensation and the share exchange ratio are adequate. In doing so, the expert must also indicate the methods used to determine such compensation and assess the fairness of the share exchange ratio.

The requirement to prepare such a report does not apply if all members of each of the companies involved in the cross-border merger have agreed to waive it, or where the Maltese merging company is a single-member company, in which case the exemption applies automatically.

 The second part of the series will focus on the procedure for obtaining pre-merger certificates and the steps involved in the completion stage of a cross-border merger.