Section 2: Cross-border mergers fundamental
requirements
In any legal act carried out in accordance with an international
merger, foreign companies must be recognized to legally set up by virtue of
merger in any relevant legal system. Because cross border mergers are between
companies subject to differing national company Laws, conflicts may arise
regarding which Law ought to be applied to the exclusion of the others, the
absorbing company corporate Law or the absorbed company corporate Law.
The first paragraph will study the recognition of foreign
companies' principle 1 and the second paragraph will explain the need to
coordinate between the different company Laws of the companies participating in
the merger 2
Pargi: Recognition of foreign companies participating
in a merger: European approach
The recognition of foreign companies is based on the freedom
of Establishment principle (A), principle with no uniform European legal basis
(B)
A- The Principle:
From European perspectives, in order to permit companies to
easily engage in transnational transactions in other member states such as
cross border mergers ,the European Community, according to the Rome
treaty108 known as the European Community Treaty, has required from
their member states "to enter into negotiations regarding equality of
protection of persons, the abolition of double taxation within the community ,
the possibility of mergers between companies or firms governed by the Laws of
different countries, and the mutual recognition of companies or firms , inter
aliaff.1°9 Consequently, the European community set out some
basis of freedoms. These are the free movement of person, the free movement of
service and capital110, and particularly in connection with company
Law, the freedom of establishment, contained in articles 52 of 58 of the
European Community treaty.
Article 52 requires the EU member states "to abolish restrictions
on the freedom of establishments of nationals of a member state in the
territory of another member State by progressive stages in the course of the
transitional period. The same article adds that such progressive abolition
shall also apply to restrictions on the setting up of agencies, branches, or
subsidiaries by nationals of any member State established in the territory of
any member State"111.
In considering the concept of freedom of establishment of
companies, article 52, second paragraph states that: "Freedom of establishment
shall include the right to take up and pursue activities as self-employed
persons and to set up and manage undertakings, in particular companies or firms
within the meaning of the second paragraph of Art. 58, under the
108 Rome Teary was signed on 25 march 1957 establishing the
European Community (EC) amended by the treaty of Amsterdam in 1997 which
essential goal was the harmonization of company Law and the creation of a
Common market to eliminate the disparities between national Laws of the member
states.
109 Article 220 of the Rome Treaty See appendices 5
110 Title III "Free movement of persons, services and
capital" of the Rome Treaty.
111 Article 52 id. see appendices n°5
Conditions laid down for its own nationals by the Law of the
country where such establishment is effected, subject to the provisions of the
Chapter relating to capital". This article must be read in conjunction with
article 58 of the Treaty, which provides that "companies or firms formed in
accordance with the Law of a member states and having their registered office,
central administration or principle place of business within the Community, for
the purposes of this chapter, are to be treated in the same way as natural
persons who are nationals of member states".112
The freedom of establishment guarantees the general right to
create permanent institutions necessary for the independent operation of
business activities and the right to set up companies.
In the broad sense, the freedom of establishment describes the
right of business which is based in one member state to move to another member
state and set up there, or subsidiary business in another member state. In this
regards, a distinction between "secondary establishment" and "primary
establishment" need to be made: The right of a company within the meaning of
article 58 of the Treaty to freely set up a subsidiary is commonly referred to
as freedom of "secondary establishment". In this context branches or
subsidiaries are forms of "secondary establishments". The very recent decision
of the European Court of justice dated March 9th, 1999, in the
matter of Centro's Ltd v Erhvervs-org Selskabsstyrelsen, illustrates a case Law
concerning the rights of secondary establishment. By contrast, little case Law
has examined the primary establishment113. The freedom of
establishment Principle does not have, however a uniform international legal
basis within the European Union114.
112 Article 58 Rome Treaty id
113 Primary establishment is "the right of a company to establish
it self in a member state, other than the one where it is incorporated , by
transferring its real seat to this member state while retaining the links and
giving its corporate nationality of the first member state, normally be
retention of a registered office there..." Forstinger
114 EC Treaty on the Mutual recognition of Companies and Juristic
Persons of 29 February 1968 (BGBI, II, 1972, 370) has never come into force for
lack of ratification by the Netherlands.
The European community has been divided between what is known on
one hand as the "Incorporation theory", and on the other hand as the "Real seat
theory". If the first theory connects a company to the jurisdiction in which it
has been incorporated, so that the company may develop whatever activities it
exercises in other states without losing its original status, the second theory
starts from social and economic reality and applies its legal order to all
entities that are effectively directed from within its territory.
Where the first theory recognises all foreign legal entities
according to the rules applicable in the state of origin, the second theory
refuses to recognise companies that claim to belong to another jurisdiction
which is not the one in which their real seat is established. The real seat of
a
company has been described as the company's head quarters, the
brain of the enterprise or the place where the final decisions are made.
(Article 10
Tunisian Commercial Companies Code, same position).
The controversy is especially strong where the question of the
crossing of the state borders is concerned. This is also the subject of the
cross border merger, subject on which harmonisation has not been able to make
any progress for several decade.
B- The Debate: Com mon law v Civil law
The divergences between the legal basis recognizing foreign
companies to migrate by way of merger in another country without losing their
"legal status" have generated an extensive debate between civil law and common
law legal systems.
On the one hand, the "real seat" theory, prevailing within
Europe, as the case in France115, and in the Tunisian legislation in
force (article 10 §1 of the Commercial Companies code stating that:
"companies that have
115 Articles 1837 French Civil .code and L-210-3 C-com
related to the commercial compagnies states in §1, «les
sociétés dont le siége social est situé sur le
territoire français sont soumis à la loi française
»
their registered office based in the Tunisian territory are
governed by the Tunisian Law"116), on the other hand, the
incorporation theory is still applicable in Great Britain and in a limited form
in Italy.
Consequently in countries which have adopted the real seat
theory, companies that have their central administration in a country other
than their registered office are non existent as legal entities. They are then
subject to the Law of the State where they have their central administration
and do not enjoy the benefits of incorporation under the Local Company Law.
Therefore, those countries who have applied this theory, wary of possible
evasion from their national company law through manipulation of the rule, will
deny the legal existence to companies that have their real seat in a country
other than where it is registered. It involves that companies of these civil
law countries, that want to migrate by way of merger for example, must wind up.
The Real seat theory is essentially based on the idea that the company should
have a real link with the state of whose legal system it claims
application.(real link according to article 39 of the International private law
Tunisian Code) If no such link exists, the company
will not be allowed to qualify under its jurisdiction.
By definition, merger transaction involves the dissolution of the
acquired company without winding up. Cross border mergers would equally be
rendered impossible.The situation is different in common law systems,
particularly in the US.
The American Corporate Law which has adopted the incorporation
theory analyses the issue in a different way. The Law applicable to the company
that wants to migrate from one state to another is the Law which the
incorporators have chosen in the articles of incorporation117.
However State Corporate Laws are subordinate to the states corporate Law
regulations. Cross border mergers in the US are expressly allowed by the
corporate Law of Delaware with regards to companies in other US
116 Article 10 of the TCCC " les
sociétés dont le siège social est situé sur le
territoire tunisien sont soumises à la loi tunisienne... » personal
translation
117 Kaplan, F., "foreign Corporations and local
Corporate Policy", 1968, Van Law Review , Westlaw data base
States as well as non US companies to the extent that the merger
is allowable under the applicable foreign company Law118.
Accordingly, in jurisdictions adhering to the incorporation theory, the
transfer of the "seat" of the company has no legal meaning. The company remains
subject to the jurisdiction of the state in which it was incorporated, in which
it has its registered office. The incorporation theory allows the directors of
the company to freely choose for the legal system they think most appropriate:
once the choice is made, it can be maintained throughout the company's life.
The "legal status" of the company can be determined regardless of the state in
which its activity is effectively deployed. Other states would therefore have
to accept this "foreign" element.
Jurisdictions adhering to the "real seat" theory will refuse
these companies, whether by disqualifying them, or by submitting them to their
own legal order, when the company is being managed from their own territory. By
contrast, in jurisdiction adhering to the "incorporation" theory, a company is
free to establish an operational seat in another jurisdiction without incurring
dissolution of the company, or any other consequence.
The European Court of Justice has confronted the issue of the
real seat rule and company migration in the Daily Mail case 119: In
this case a U.K. company wished to transfer its residence to the Netherlands
and set up a subsidiary in the United Kingdom as a foreign company. The
Treasury had to give permission to make such a transfer; it denied it, and
Daily Mail challenged the requirement for permission, arguing that since the
transfer constituted a transfer of establishment, the requirement was a
restriction on its freedom of establishment.
118 DGCL art 252(a) any 1 or more corporations
existing under the laws of this State may merge or consolidate with 1 or more
corporations organized under the laws of any jurisdiction other than 1 of the
United States if the laws under which the other corporation or corporations are
organized permit a corporation of such jurisdiction to merge or consolidate
with a corporation of another jurisdiction".
119 The Queen v. H.M. Treasury and Commissioners of Inland
Revenue, ex parte Daily Mail and General Trust PLC [hereinafter The dail mail
case 1989 ECJ
The European Court of Justice stated that, "unlike natural
persons, companies are creatures of the Law and, in the present state of
Community Law, creatures of national Law. They exist only by virtue of national
legislation which determines their incorporation and functioning"
120.
However, it appeared from the Daily Mail case that one of the
main advantages of the incorporation technique: whatever happens, the company
can act according to its original, familiar company Law system.
Even if exclusively operating in a foreign country, the rules of
its domestic jurisdiction remain in force. By contrast, companies establishing
a seat in a jurisdiction adhering to the incorporation theory - e.g. French or
a Tunisian company transferring its seat to the US- will not be affected by the
American company Law. According to the incorporation theory a company can
subject itself to the jurisdiction of another state.
The company who doesn't have a real link with the state of whose
legal system it claims application can be allowed to qualify under its
jurisdiction. Cross border mergers are therefore possible.
Divergences regarding the carrying on of cross border mergers may
increase when it concerns conflicts of law matters. That's why it is necessary
to coordinate between national laws in this regard.
120 The daily mail case Op.cit note 2 page 42 id
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