This report aims at analysing the implications of changes in European Corporate Law on cross-border mergers, with particular focus on strategic management’s decision on intangible assets of the integration stage. It consists of two parts, (1) an analysis of the implications of changes in European Corporate Law, and (2) an assessment of their impact on post merger integration. Part 1 is about the European Court of Justice’s jurisdiction and its implications on German Corporate Law: It explores how European Law is influencing and thereby changing national law. Having analysed the effect of its rulings on – until recently in continental Europe prevailing – seat theory, I carefully analyse the subsequent developments and trends, including reform of the German Limited Liability Company Act (MoMiG), competition of legal forms, opportunities offered by recently introduced supranational legal forms with particular focus on the Societas Europaea, and EU merger directive with its influence on the German Transformation Act. Part 2 not only critically evaluates prevailing merger integration theories, it also reflects on the opportunities the afore-mentioned changes in European Corporate Law offer to successful post merger integration. Hence, I analyse and further develop Jansen’s 7c model and educe a strategic plan.
Table of Contents
ABSTRACT
LIST OF FIGURES
LIST OF ABBREVIATIONS
I. INTRODUCTION
II. CHANGES IN EUROPEAN CORPORATE LAW: AN OPPORTUNITY FOR SUCCESSFUL POST MERGER INTEGRATION?
1. M&A FOUNDATIONS
1.1 OVERVIEW ON THE M&A MARKET
1.2 TYPES OF M&A DEALS
1.3 THE M&A PROCESS
2. EUROPEAN CORPORATE LAW
2.1 T HEORETICAL FOUNDATIONS : ANALYSIS AND CRITICAL EVALUATION
2.1.1 CHARACTERISTIC ASPECTS OF GERMAN LAW
2.1.2 THE RELATIONSHIP BETWEEN EUROPEAN LAW AND NATIONAL LAW
2.1.3 RECOGNITION OF COMPANIES WITH FOREIGN LEGAL FORM
2.1.3.1 THE IMPACT OF THE ECJ’S JURISDICTION ON THE APPLICATION OF SEAT THEORY
2.1.3.2 CONSEQUENCES: COMPETITION OF LEGAL FORMS AND GERMAN “MOMIG”
2.1.4 THE OPPORTUNITIES OF SUPRANATIONAL LEGAL FORMS
2.1.4.1 SE SOCIETAS EUROPAEA
2.1.4.2 OTHER
2.1.5 THE RIGHT TO CHANGE THE LEGAL STRUCTURE
2.1.5.1 THE EU CROSS-BORDER MERGERS DIRECTIVE: LEGAL DEVELOPMENT
2.1.5.2 GERMANY: NEW OPTIONS FOR CORPORATIONS
2.1.5.3 TRANSFORMATION ACT: FORMS TO CHANGE THE LEGAL STRUCTURE
2.1.6 TRENDS AND PROSPECTS
2.2 A PPLYING THEORY TO PRACTICE : EXEMPLIFICATION
2.3 F INDINGS : IMPLICATIONS ON POST MERGER INTEGRATION
3. POST MERGER INTEGRATION
3.1 T HEORETICAL FOUNDATIONS : ANALYSIS AND CRITICAL EVALUATION
3.1.1 CLASSIFICATION OF THE CONTEXT
3.1.2 DEFINITIONS AND FORMS
3.1.3 JANSEN’S 7C MODEL OF INTEGRATION
3.1.3.1 C1: COORDINATION OF INTEGRATION
3.1.3.2 C2: CULTURE
3.1.3.3 C3: CUSTOMERS AND SUPPLIERS
3.1.3.4 C4: COMMUNICATION
3.1.3.5 C5: CORE EMPLOYEES
3.1.3.6 C6: CORE COMPETENCY AND KNOW-HOW
3.1.3.7 C7: CONTROL AND AUDIT
3.1.3.8 CORRELATION TO THE CHANGES IN EUROPEAN CORPORATE LAW
3.1.3.9 CRITICAL APPRAISAL AND FURTHER DEVELOPMENT
3.1.4 TRENDS AND PROSPECTS
3.2 A PPLYING THEORY TO PRACTICE : A STRATEGIC PLAN
3.3 F INDINGS
III. CONCLUSION AND PROSPECTS
APPENDIX
GLOSSARY ENGLISH-GERMAN
REFERENCES
Abstract
This report aims at analysing the implications of changes in European Corporate Law on cross-border mergers, with particular focus on strategic management’s decision on intangible assets of the integration stage. It consists of two parts, (1) an analysis of the implications of changes in European Corporate Law, and (2) an assessment of their impact on post merger integration. Part 1 is about the European Court of Justice’s jurisdiction and its implications on German Corporate Law: It explores how European Law is influencing and thereby changing national law. Having analysed the effect of its rulings on – until recently in continental Europe prevailing – seat theory, I carefully analyse the subsequent developments and trends, including reform of the German Limited Liability Company Act (MoMiG), competition of legal forms, opportunities offered by recently introduced supranational legal forms with particular focus on the Societas Europaea, and EU merger directive with its influence on the German Transformation Act. Part 2 not only critically evaluates prevailing merger integration theories, it also reflects on the opportunities the afore-mentioned changes in European Corporate Law offer to successful post merger integration. Hence, I analyse and further develop Jansen’s 7c model and educe a strategic plan.
German Translation. Dieser Bericht zielt darauf ab, die Auswirkungen der Änderungen im europäischen Gesellschaftsrecht bei grenzüberschreitenden Fusionen zu analysieren, insbesondere im Hinblick auf Entscheidungen des strategischen Managements bezüglich der immateriellen Werte in der Integrationsphase. Er besteht aus zwei Teilen, (1) einer Analyse der Auswirkungen der Änderungen im europäischen Gesellschaftsrecht, und (2) einer Beurteilung ihrer Bedeutung für die Post Merger Integration. Teil 1 behandelt die Rechtsprechung des Europäischen Gerichtshofs und deren Auswirkungen auf deutsches Gesellschaftsrecht: Er untersucht, wie europäisches Recht nationales Recht beeinflusst und dabei verändert. Nachdem ich die Auswirkungen der Entscheidungen bezüglich der bis vor Kurzem in Kontinentaleuropa vorherrschenden Sitztheorie analysiert habe, untersuche ich sorgfältig die nachfolgenden Entwicklungen und Trends, inklusive der Reform des deutschen GmbH-Rechts (MoMiG), dem Wettbewerb der Rechtsformen, den durch kürzlich eingeführte supranationale Rechtsformen entstandenen Chancen mit besonderem Schwerpunkt auf der Societas Europaea, und der EU-Verschmelzungsrichtlinie mit ihrem Einfluss auf das deutsche Umwandlungsgesetz. Teil 2 bewertet nicht nur kritisch die vorherrschenden Integrationstheorien bei Fusionen, er reflektiert auch über die Chancen, die die zuvor genannten Änderungen im europäischen Gesellschaftsrecht für eine erfolgreiche Post Merger Integration bieten. Deshalb analysiere ich Jansen’s 7 K-Modell, entwickle es weiter, und leite einen strategischen Plan daraus ab.
Keywords. Mergers & Acquisitions, Germany, automotive industry, European Corporate Law, post merger integration, intangible assets, Sevic, Cartesio, race to the bottom, MoMiG, SE, SPE, DIR 2005/56/EC, Transformation Act, Opel, Schaeffler, 7c model, strategic plan
List Of Figures
FIGURE 1 – DRIVERS FOR ALLIANCES, MERGERS AND ACQUISISTIONS
FIGURE 2 – GLOBAL M&A ACTIVITY TREND 2003-2008
FIGURE 3 – BREAKDOWN OF ANNOUNCED DEALS 2008 BY GEOGRAPHIC REGION
FIGURE 4 – THE FOUR STAGES OF CONSOLIDATION (BY INDUSTRY)
FIGURE 5 – TOP 10 ANNOUNCED GLOBAL DEALS 2008
FIGURE 6 – TYPES OF M&A DEALS
FIGURE 7 – THE 3 STAGES OF THE M&A PROCESS
FIGURE 8 – GERMAN CORPORATE LAW: A COMPARISON OF LEGAL STANDARD FORMS
FIGURE 9 – THE RELATIONSHIP BETWEEN EUROPEAN LAW AND NATIONAL LAW
FIGURE 10 – EUROPEAN SECONDARY LAW: STATUS OF TRANSPOSITION
FIGURE 11 – SEAT THEORY AND INCORPORATION THEORY
FIGURE 12 – GERMAN ‚MOMIG’ 01.11.2008
FIGURE 13 – THE IMPACT OF THE SE COUNCIL REGULATION
FIGURE 14 – OTHER SUPRANATIONAL LEGAL FORMS
FIGURE 15 – COMPARISON: SPE AND LIMITED LIABILITY COMPANY
FIGURE 16 – THE IMPACT OF EUROPEAN MERGER DIRECTIVES ON NATIONAL LAW
FIGURE 17 – COM (2008) 26: STATUS OF DECISION-MAKING PROCESS
FIGURE 18 – FORMS TO CHANGE THE LEGAL STRUCTURE
FIGURE 19 – SE: OPEL / VAUXHALL
FIGURE 20 – MERGER: SCHAEFFLER / CONTINENTAL
FIGURE 21 – THE 3 STAGES OF THE M&A PROCESS: PMI
FIGURE 22 – THE MERGER SYNDROME
FIGURE 23 – THE STAKEHOLDERS OF THE COMPANY
FIGURE 24 – FORMS OF INTEGRATION
FIGURE 25 – JANSEN’S 7C MODEL OF INTEGRATION
FIGURE 26 – 8C MODEL OF INTEGRATION
FIGURE 27 – FORMULA FOR SUCCESSFUL POST MERGER INTEGRATION CONDITIONS
FIGURE 28 – THE FOUR STAGES OF THE PLANNING PROCESS
FIGURE 29 – STRATEGIC PLAN: ANALYSIS STAGE
FIGURE 30 – STRATEGIC PLAN: STRATEGY AND PLANNING STAGE
FIGURE 31 – STRATEGIC PLAN: IMPLEMENTATION STAGE
FIGURE 32 – STRATEGIC PLAN: MONITORING AND CONTROL STAGE
FIGURE 33 – LEAGUE TABLE OF LEGAL ADVISERS TO GLOBAL M&A
FIGURE 34 – LEAGUE TABLE OF FINANICAL ADVISERS TO GLOBAL M&A
FIGURE 35 – LEAGUE TABLE OF PR ADVISERS TO GLOBAL M&A
FIGURE 36 – FOREIGN LEGAL FORMS X
FIGURE 37 – ARTICLES APPLIED: EC TREATY XII
List Of Abbreviations
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I. Introduction
Only 9% of M&A are successful and have achieved its original objectives (Hay, 2007:2).1 Can an economy afford this? How can the percentage of successful M&A be increased, especially nowadays with the number of distressed M&A expected to rise?
These questions are of major importance, especially for the export nation Germany, heavily suffering from today’s credit crunch and the subsequent economic downturn.
Being the world’s number one export nation, Germany strongly depends on international trade, internationalisation and globalisation and, thus, is heavily affected by the current economic situation. The automotive industry still is Germany’s major contributor to this role: In 2008, the export share of motor vehicles and parts amounted to 17.5%, consolidating its position as driving force of the economy – though it has declined for the first time in this decade to EUR 181 billion, which is mainly based on reduced sales in Western Europe and the NAFTA region (www.destatis.de/jetspeed/ portal/cms/Sites/destatis/Internet/EN/Content/Statistics/Aussenhandel/Handelswaren/Ak tuell.psml, 29.03.2009; VDA, 2009:5). In Germany, one out of six jobs is allocated to the automotive industry; hereof 43% are employed with the automotive suppliers (Wyman, 26.02.2009:1). For years, the automotive sector has been in a severe crisis and restructuring process, with up to 70% of processes and value added being transferred from the OEM to the suppliers – or the after-sales market. Besides the fierce competition of an enormous number of suppliers and high cost pressure from the OEM, this goes along with high financing costs for personnel, research and development, and liability regulations. According to Mercer’s 2004 survey ‘FAST 2015’, the number of automotive suppliers was supposed to decrease by 50% until 2015. Today, with the credit crunch and subsequent economic downturn, this process is expected to accelerate, with some very large auto companies being close to insolvency.
A market adjustment is mandatory in many industrial sectors, mainly due to the fact that many companies will no longer receive sufficient financing, and cash-pooling gains in importance. It is expected that the banks – that are already reluctant to provide loans – will further restrict the extension of loans, especially for highly leveraged deals, at higher interest charges. In addition, only companies with an excellent reputation and creditworthiness will be able to obtain money from the capital market. The combination of declining sales, restricted extension of loans at high interest rates, and low equity ratio is hazardous. Therefore, the consequences of the economic downturn will affect all industrial sectors, with the export-orientated automotive industry in particular.
Yet, the reasons for M&A are different than in the past: According to KPMG’s very recent automotive survey, the drivers have shifted from a clear ‘access to new markets and customers’ in 2007, to a mixture of reasons, including a high ‘risk of bankruptcy’ in 2009. Details can be obtained from the below illustration.
Figure 1 – Drivers For Alliances, Mergers And Acquisistions
Source: KPMG, 2009:19
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In view of the above, it is hard to judge if large M&A deals will be put on hold due to the difficult financing nowadays. Even fixed mergers are at risk because of this situation, as is currently illustrated by Schaeffler–Continental. However, it is expected that many companies will become insolvent due to the forced market restructuring and thus have to consider in time merging with others or demerging parts of their business in order to sell it, as is illustrated by General Motors–Opel/Vauxhall. If this is the case, the prices obtained are expected to be much lower than in previous years.
Yet, the financing of an M&A remains difficult. This is one of the main reasons why the total amount of M&A has experienced a major decrease in 2008: Globally, the total value of USD 2.5 trillion represented a drop of 31%, while volumes were down 20% on just over 12,000 deals (MergerMarket, 2009a:2). This has affected all sectors, especially in the last quarter 2008.
In light of the above, all the more important is it that M&A are successful – and a 9% success rate compared to the original objectives of the deal is by far not enough. This is unaffordable, especially in today’s economic situation.
Therefore, this paper outlines how the number of successful M&A can be increased, focusing on changes in European Corporate Law and thus resulting opportunities offered for successful post merger integration. In doing so, this report aims at analysing the implications of these changes on merger integration, with particular focus on strategic management’s decision on intangible assets of the integration stage. This is imperative, as most managers only focus on tangibles of the deal, while recent surveys have proven that intangibles are equally important for deal success. Its focus is the German automotive industry and cross-border activities within Europe.
Given the scope of this paper, 3rd country M&A, tax issues, tangible assets, pre merger and transaction stage are not part of this analysis, and are only mentioned marginally.
This paper enables automotive companies to better prepare for possible upcoming transformations within this sector, by providing an outline of the existing opportunities for successful PMI, and highlighting the issues that have to be considered.
II. Changes In European Corporate Law: An Opportunity For Successful Post Merger Integration?
The main part of this report is divided in two sub-categories, (1) an analysis of changes in European Corporate Law, and (2) an assessment of their implications on post merger integration. First of all, it introduces major merger and acquisition aspects to provide a mutual basis.
1. M&A Foundations
To create a mutual understanding, I will provide a brief overview on the M&A market and the various types of M&A deals, before explaining the M&A process.
1.1 Overview On The M&A Market
In 2008, after a continuous rise in both M&A value and volume, the 6th wave of global M&A has come to a sudden end. The total amount of M&A has decreased significantly: Globally, the total value of USD 2.5 trillion represented a drop of 31%, while volumes were down 20% on just over 12,000 deals. North America, the main M&A market with usually more than 40% of values globally, now only represents 34% – a decline from USD 1.5 trillion to 848 billion, i.e. a drop of 44%. Declines in Europe are comparable to the global trend with a decline from EUR 1.1 trillion to 742 billion and thus a drop of 32% in value, whereas the Asia-Pacific region has only experienced a minor decline of 5% by value from USD 420 billion to 399 billion (MergerMarket, 2009a:2).
This has affected all sectors, especially in the last quarter 2008. It is not astonishing that the busiest sector by value was financial services with 25% of values, given the urgent need to consolidate. All other sectors and private equity firms suffer from the difficulty in adequate financing. Within Europe, UK & Ireland and the Germanic countries are most active. An overview of both the global M&A activity trend 2003 – 2008 and the deals by geographic region can be obtained from the below illustrations.
Figure 2 – Global M&A Activity Trend 2003-2008 Source: MergerMarket, 2009a:7
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Figure 3 – Breakdown Of Announced Deals 2008 By Geographic Region Source: MergerMarket, 2009a:8+14 (modified)
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Despite the decline, these figures show that M&A are an integral part of today’s business world. According to Kearney’s merger endgames survey, all industries and thus M&A even follow a certain pattern, from ‘market entry’ over ‘growth accumulation’ and ‘focus on position’ to ‘alliances’, details can be obtained from the below illustration. According to their survey, the global automotive supplier industry is in the ‘growth accumulation’ stage, focusing on economies of scope and scale and preventing themselves from hostile takeovers, whereas the automotive manufacturer industry already is in the ‘focus on position’ stage, i.e. strengthening their core competencies and cleaning up their portfolio. When they reach the alliance stage, mergers will no longer apply, because of their high market shares and the thus resulting anti-trust law restrictions. To sum up, to remain competitive in the long run, it is important to actively pursue the consolidation of one’s own industry (Kearney, 2001:1).
Figure 4 – The Four Stages Of Consolidation (By Industry)
Source: Kearney, 2001:6
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It has to be highlighted that as a result of today’s economic situation many deals lapsed, so did one of the biggest hostile takeovers all-time, the BHP Billiton–Rio Tinto deal. Unsurprisingly, the top 10 of announced deals 2008 include several financial institutions such as Merrill Lynch, as a consequence of the credit crunch and the thus resulting need to consolidate, but only one deal of the automotive industry, Schaeffler-Continental. The full list can be obtained below.
Figure 5 – Top 10 Announced Global Deals 2008
Source: MergerMarket, 2009a:6
illustration not visible in this excerpt
In an M&A deal, several parties are involved, including (1) the bidder company, (2) the target company, (3) external sources, and (4) a broad range of advisers with expertise knowledge. The bidder company can be either a strategic investor or a financial investor. The target company can be any organisation, either actively looking for a bidder, or being targeted by means of a hostile takeover. External sources are usually the banks, offering various forms of financing to use the leverage effect. Alternatively, it can be asset-backed securities, private equity, hedge funds or even family offices. In the field of advisers, there is a broad range of legal, financial and PR advisers; the ranking in terms of the league tables 2008 can be found in the appendix.
1.2 Types Of M&A Deals
There are various definitions of Mergers and Acquisitions. In brief, they can be defined as “a link between two or more companies or parts of companies, implying that the ownership structure of at least one company or part of a company changes” (DGFP, 2002:15). In the following, the terms M&A, mergers, deals and transactions are used synonymously.
As is illustrated below, M&A disregard contractual agreements such as traditional contracts (e.g. franchising, licensing) as well as non-traditional contracts (e.g. joint research & development, shared services). Co-operations such as joint ventures also differ from M&A, as they maintain their economic and corporate sovereignty (Child J, 2006:224, Picot G, 2008:271).
Figure 6 – Types Of M&A Deals
Source: Own illustration
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M&A can either be conducted as (1) ‘ share deal ’ or as (2) ‘ asset deal ’. A share deal implies that the bidding company acquires shares of the target company, e.g. shares or the provision of the general partner. Depending on the share, the influence on the target company varies. This form does not have a direct effect on employment relationships with the target company, as the bidding company enters the rights and duties of the former owner (‘ universal succession’). Though a share deal is a very straightforward acquisition, it might include unknown debts, which are a high liability risk. In addition, the share deal of a public M&A implies that a binding offer has to be made to all shareholders, if more than 30% of voting rights are acquired (§29 German Securities Acquisitions and Takeover Act). In contrast, an asset deal implies that assets are transferred from the target company to the bidding company, e.g. real estate, divisions of the company. This form has a direct effect on employment relationships, as they are transferred to the bidding company by means of the asset transfer (‘ singular succession’): Pursuant §613 German Civil Code, collective labour agreements in principle devolve to the bidding company with the previous labour conditions and under consideration of job seniority, with the employees having the right of objection (“Betriebsübergang”), and the workers council having the right of co-determination pursuant §111 German Work’s Constitution Act. An asset deal offers the benefit of selecting single assets and avoiding the risks of unknown debts, though additional approvals might be required. An asset deal is of particular importance for distressed M&A, i.e. insolvent companies after adjudication order, as nobody wants to take the full risk and liabilities: Pursuant §25 German Commercial Code, former debts are explicitly excluded from the deal (DGFP, 2002:17; Picot G, 2008:209).
In addition, there are many other types of M&A deals that can be considered as M&A in a broader sense, including Management buy-out (MBO) when the company is acquired by the former managers, Management buy-in (MBI) when the company is acquired by external managers, Leveraged buy-out (LBO) or Leveraged buy-in (LBI) if the MBO or MBI requires additional funding by Private Equity (PE), Public Private Partnership (PPP) when a long-term cooperation is agreed upon between the public authorities and the private sector, as well as Initial Public Offerings (IPO) when additional equity is required for future M&A (Picot G, 2008:324).
1.3 The M&A Process
The M&A process can be divided in three stages, (1) pre merger stage, (2) transaction stage, and (3) post merger stage. The pre merger stage is concerned with the decision-making process related to the deal, the transaction stage involves the actual deal, and the post merger stage entails the implementation of the ex ante developed integration strategy (Picot G, 2008:22).
The below illustration shows that strategic management is involved in all three stages, though the pure strategy is of importance mainly at the very beginning of the pre merger stage and again in the second half of the transaction stage, in order to develop a post merger strategy; the high importance of this strategic management task is illustrated by the dark colour. Besides the pure strategy, strategic controlling is of importance during the entire transaction and post merger stage. Strategic management is also required in the field of organisation, HR management and placement, as well as communication. Their strategic view is important in the transaction stage, but gains even more in importance in the post merger stage (Borowicz F, 2006:168).
Figure 7 – The 3 Stages Of The M&A Process
Source: Borowicz, 2006:168 (modified)
illustration not visible in this excerpt
In the three stages, some standard activities apply respectively. In the (1) pre merger stage, concerned with the decision-making process related to the deal, this includes basic strategy, screening of target candidates, Information Memorandum (IM) offering the benefits of the target company, informal exploratory talks after the signing of a respective Confidentiality Agreements (CA) also known as Non-Disclosure Agreement (NDA), rough business evaluation and financing planning, first planning of concept and transaction structure, ex ante examination in terms of anti-trust law, and signing of preliminary contracts by means of a Letter of Intent (LoI), also known as Memorandum of Understanding (MoU).
The (2) transaction stage, involving the actual deal, includes activities in the field of due diligence, business valuation and financial planning, internal resolutions, contract negotiation and signing, Material Adverse Change-clauses (MAC) to fix contract adaptation or withdrawal rights in favour of the bidding company in the period between signing and closing, final registration for merger control in terms of the anti-trust law, as well as transfer of ownership when the bidding company settles the purchase price and in turn the target company is transferred (closing). In this stage, the due diligence is of major importance, as it is the basis for the negotiations and thus the purchase price. This evaluation of the target company is highly labour-intensive and time-consuming and takes place in a data room, either virtually or physically. Though it is common to have a purchaser due diligence, a vendor due diligence sometimes also applies. The due diligence can be split into several sub-evaluations, i.e. legal, tax, financial, commercial, HR, organisational, cultural, IT and logistics, as well as environmental due diligence.
Last, the (3) post merger stage, entailing the implementation of the ex ante developed integration strategy, entails the implementation of organisational, HR and cultural, and communication strategies in line with the overall strategic plan, as well as their monitoring and controlling. The refinement of the strategic plan in details as well as an ongoing adaptation is mandatory. An evaluation of the integration process in terms of time, quality and costs is important; the introduction of knowledge management in terms of best practice experience and lessons learned is recommended for the ongoing deal as well as upcoming future deals (Borowicz F, 2006:168, Gran A, 2008:1409, Picot G, 2006:156, Van Kann J, 2009:1)
2. European Corporate Law
This Corporate Law section is divided into three parts, i.e. a detailed analysis and critical evaluation of theory as theoretical foundations with focus on the implications of changes in European Corporate Law, an application of theory to practice by means of an illustration of recently applied European Corporate Law in the German automotive industry, and the findings with their implications on merger integration.
2.1 Theoretical Foundations: Analysis And Critical Evaluation
This section analyses and critically evaluates European Corporate Law. After providing an overview of the characteristic aspects of German law, I explore the relationship between European and national law. Subsequently, I analyse the recognition of companies with foreign legal forms in light of the European Court of Justice’ jurisdiction on seat theory and the thus resulting reform of the German Limited Liability Company Act (MoMiG), before I examine the opportunities offered by supranational legal forms, as well as by the right to change the legal structure in terms of the recently implemented EU cross-border merger directive and the German Transformation Act. The findings are summarised at the end of each chapter. The section concludes with a summary of the trends.
2.1.1 Characteristic Aspects Of German Law
In Europe, there are as many legal systems as there are nation states. This is partly due to jurisprudence, i.e. “that the law of a country has come to be regarded as a characteristic expression of its national spirit” (Zimmermann R, in Reimann & Zekoll, 2005:8). However, since the adaptation of a joint EC law and its superseding jurisdiction with binding nature for all member states, this has started to change.
This report focuses on German Corporate Law in light of the changes in the preceding European level. Corporate Law aims at framing options and regulating boundaries of associations of persons that have been founded for a common purpose. As in Germany Corporate Law consists of two fields of law – private law for private coalitions, and business law for coalitions with economic intentions – it can be defined concisely as “the law of associations under private law and of cooperative contractual relationship” (Schmidt K, 2002: §1,1).
The legal basis for German Corporate Law can be found in a variety of Acts and Codes, but there is not one single Code that contains all general regulations. Consequently, not only the regulations of the Civil Code such as legal capacity, conclusion of contract and declaration of intend apply. Depending on the subject matter, the relevant sections of Commercial Code, Companies Act, Limited Liability Company Act, and Transformation Act, etc also apply.
There are two legal standard forms that can be distinguished, corporations and partnerships. Both forms are based on a contract, can acquire rights and obligations, and are able to sue or be sued. Partnerships, however, only have partial legal personality, i.e. they cannot own assets, as they belong to the partners in joint ownership (“Gesamthandsgemeinschaft”): Assets of partnerships may only be transferred concordantly, e.g. by means of a partnership contract or a general meeting. Whereas the partners of partnerships are jointly and severally liable, the members of corporations have a fixed share capital. I have elaborated the major differences in their structure, purpose, features and sample legal forms; details can be obtained from the below illustration.
Figure 8 – German Corporate Law: A Comparison Of Legal Standard Forms
Source: Own illustration
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Legal forms for corporations such as stock companies and private limited companies are primarily in use in the middle market and large-scale enterprises, with the limited liability company being predominant with more than 1,000,000 companies, followed by the stock companies with 10,500. Partnerships such as general, limited and dormant partnerships are common for small medium enterprises, with general partnerships forming the majority with approximately 250,000 partnerships (Assmann HD, Lange B, Sethe R, in Reimann & Zekoll, 2005:143). Both can be involved in merger and acquisition activities, though cross-border mergers are unlikely to involve partnerships due to the current legal framework.
2.1.2 The Relationship Between European Law And National Law
Though there are as many legal systems in Europe as there are nation states, there have been several attempts to align these systems. Whereas considerable harmonisation has already been achieved, particularly in terms of cross-border mergers and by implementing supranational legal forms, a full alignment of national Corporate Laws has not yet been accomplished. However, in adopting a joint European Community law, a legally binding consolidated jurisdiction has been created.
European law – whether of primary or secondary nature – has priority over National Law. Primary law includes the three founding treaties (European Coal and Steel Community Treaty signed 1952 and the Treaties of Rome signed 1958, i.e. European Economic Community Treaty and European Atomic Energy Community Treaty) with their minutes and subsequent changes, such as the Maastricht Treaty on European Union 1993, the Treaty of Amsterdam 1999 and the Treaty of Lisbon 2007 (http://europa.eu/abc/treaties/index_en.htm, http://eur-lex.europa.eu/en/treaties/ index.htm, all 05.02.2009).
Secondary law refers to regulations made by the Community institutions or bodies and is deduced from these treaties based on a verifiable legal basis. As such, it consists of regulations, directives, decisions, recommendations and opinions. Whereas a regulation generally applies and is thus binding to all member states, a directive is only binding as to the result achieved and the authorities of the Member States may choose on form and methods. Decisions are binding in its entirety upon those to whom they are addressed. Recommendations and opinions have no binding force (EC Treaty: §249; see Appendix for details). The relationship between European and National Law is illustrated in the below figure.
Figure 9 – The Relationship Between European Law And National Law
Source: Own illustration, based on http://europa.eu/abc/treaties/index_en.htm
illustration not visible in this excerpt
Within European secondary law directives, the most relevant ones in terms of Corporate Law are the Council Directives DIR 68/151/EEC (“Publizitätsrichtlinie”), DIR 77/91/EEC (“Kapitalrichtline”) with its amendment DIR 2006/68/EC regarding the foundation of stock corporations, DIR 78/855/EEC (“Verschmelzungsrichtlinie”) abrogated by DIR 2005/76/EC regarding EU cross-border mergers, DIR 78/660/EEC (“Bilanzrichtlinie”) with its amendments DIR 2006/46/EC regarding annual accounts and DIR 2006/43/EC regarding annual audits and annual accounts, DIR 89/666/EEC (“Zweigniederlassungsrichtlinie”) and DIR 89/667/EEC (“Einpersonen-Gesellschafts-Richtlinie”), among others (http://ec.europa.eu/interna_market/company/official/ index_en.htm; 22.02.2009).
Whereas Germany so far has successfully transposed the afore-mentioned European secondary law to national Corporate Law, other member states have not done so yet. I would like to highlight DIR 2005/56/EC on cross-border mergers of limited liability companies with a due date per 15.12.2007, which has not yet been transposed by Belgium, Greece, Spain, Luxemburg, Portugal, and Sweden so far. The current status of transposition of the respective directives can be obtained from the below illustration.
Figure 10 – European Secondary Law: Status Of Transposition
Source: European Commission, State of play as at 20.02.2009.
http://ec.europa.eu/internal_market/company/official/index_en.htm
illustration not visible in this excerpt
The European Court of Justice has deduced this order of priority on the basis of the autonomy of the European law and the requirement to have consistent validity of this European Law. Consequently, no national rules and regulations may override this law (ECJ verdict Costa/ENEL, NJW, 1964:2371; http://curia.europa.eu/en/instit/ presentationfr/cje.htm, 04.02.2009). The German Federal Constitutional Court has confirmed this, though they justified their decision differently, i.e. with the approval of the European Community Treaty pursuant articles 59 in conjunction with 24 (1) Basic Law. The latter permits to open up German law and thus to take back its exclusive claim to power to allow the application of European law. Besides that, it is an unwritten rule of primary European law that European law takes priority over future and current national law (“Anwendungsvorrang”). This means that in case of contradicting national law and European law, German courts have the obligation not to apply the national law.
Based on the afore-mentioned legal foundations, European law and the ECJ’s jurisdiction supersede national law in the EU member states. The ECJ’s responsibility is it to ensure consistent interpretation of European law, including an implementation of EU secondary law to national law. Therefore, in case of doubt, national courts of the final level of jurisdiction such as the German Federal Court of Justice have to submit their questions to the ECJ for ex ante decisions (“Vorabentscheid”). The verdict is binding for all national courts (Schweizer M, 2008:4).
2.1.3 Recognition Of Companies With Foreign Legal Form
Though with European Community law a legally binding consolidated jurisdiction has been created, many open aspects remain, e.g. in terms of full recognition of a company’s legal capacity when changing its statutory domicile from one member state to another. As all member states have their own legal forms with underlying rules such as the opposing theories ‘ seat theory’ and ‘ incorporation theory’, there is a certain reluctance to accept other foreign standard forms in one’s own country.
Hence, I outline the development and impact of the ECJ’s jurisdiction on the application of the – until recently in continental Europe prevailing – seat theory on German Corporate Law. Subsequently, I examine the consequences in terms of a newly created competition of legal forms in Europe that has led to a race to the bottom as well as a reform of the German Limited Liability Company Act (“MoMiG”), that is now basis for the export of German legal standard forms.
2.1.3.1 The Impact Of The ECJ’s Jurisdiction On The Application Of Seat Theory
In international Corporate Law, two major opposing theories exist regarding the assessment of foreign and domestic companies, namely seat theory and incorporation theory. This assessment is of major importance, as the impact of relocating to or from another EU member state varies significantly among the theories. In a series of verdicts (Daily Mail, Centros, Überseering, Inspire Art, Sevic, Cartesio) the ECJ’s jurisdiction has influenced and changed national law and could even further restrict national Corporate Law and thus the application of seat theory in terms of expatriation of companies, pursuant §§52, 58 EC Treaty2 regarding the European Union right to freedom of establishment. The following section explores whether there is still room for an application of the so-called seat theory under German Law.
Seat Theory. According to the seat theory, the company’s rules and regulations are determined by the company’s domicile. It is crucial that not only the company’s statutory domicile but also the actual domicile, i.e. the headquarters, is located within the state of domicile’s territory. Prior to the ECJ’s jurisdictions, companies founded in Germany who transferred their actual domicile abroad have become a legal company abroad and thus the German company had to be closed. In turn, companies founded outside Germany with an actual domicile in Germany have not been fully recognised in Germany in terms of their legal capacity and, thus, had to form a German corporation first to have legal capacity (Hirte H & Bücker T, 2005:RN 1). Even though the seat theory has certain advantages in regard to the impatriation of companies such as federal control and protection of creditor concerns, the regulation to close a company in times of expatriation is seen as a disadvantage.
Incorporation Theory. By contrast, the incorporation theory has been prevailing in countries other than continental Europe, such as the UK, Denmark or the Netherlands. Pursuant this theory, the country where the company has been founded determines its statute. This means that companies founded in the UK have been allowed to transfer their actual domicile abroad without having to close their British company, and companies founded outside the UK with an actual domicile in the UK have been fully recognised in terms of their legal capacity. The advantage of this approach lies within the free choice of domicile and the recognition of all EU companies as equal, whereas the variety of legal forms within the EU – all with their specific rules and regulations – leads to confusion for the customer, who has to get familiar with each company’s legal status in the respective home country.
A summary of the specifics of both seat theory and incorporation theory is provided in the below illustration.
Figure 11 – Seat Theory And Incorporation Theory
Source: Own illustration
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Until 1999, both seat theory and the opposing incorporation theory co-existed. It was the ECJ’s jurisdiction in the cases Daily Mail, Centros, Überseering and Inspire Art that has questioned the seat theory, whilst at the same time strengthening European fundamental rights such as the freedom of establishment (Hirte H & Bücker T, 2005:RN3).
[...]
1 This is the result of a three-phase research programme, conducted by Hay Group and La Sorbonne on European M&A: 200 interviews with senior European business leaders who have experienced a major M&A during the past three years, desk research into the 100 largest M&A, qualitative & quantitative research amongst 300 employees of merging organisations. Other recent surveys (Arthur D. Little, A. T. Kearney, Booz & Company, BCG, McKinsey, Mercer) came up with the result that 60% of mergers are not successful (Picot, 2008:571)
2 See appendix for the detailed wording of the articles
- Quote paper
- Manuela Schweizer (Author), 2009, Changes In European Corporate Law - An Opportunity For Successful Post Merger Integration?, Munich, GRIN Verlag, https://www.grin.com/document/133078
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