After more than 20 years, on October 26, 2005, the European Parliament and the Council finally approved the Directive 2005/56/EC on cross-border mergers of limited liability companies. The Directive has introduced a uniform and simplified procedure in order to pursue cross-border mergers between limited liability companies incorporated under the laws of a Member State and having their registered office, central administration or principal place of business within the Community, provided that at least two of them are governed by the laws of different Member States.

The main purpose of the Directive is to facilitate cross-border mergers within the territory of the European Union, by creating a more consistent regulatory framework which should be able to guarantee a higher degree of certainty, as well as to reduce the costs of such transaction and to provide business enterprises with an alternative tool to achieve consolidations other than the tool of the European Company (mentioned below).

The final term assigned to each Member State for the transposition of the Directive 2005/56/EC expires on December 15, 2007.

As of the date of writing of this article, the Italian legislator had still not approved any law implementing the provisions of the Directive. Therefore, in the absence of legislation implementing the provisions of the Directive 2005/56/EC in Italy and pending the term of implementation of the Directive, the “self-executing” nature of the Directive and its immediate vertical application is to be excluded.

 Accordingly, the possibility to pursue cross-border mergers according to the Directive 2005/56/EC should be denied in Italy, at least until implementation legislations enter into force in each of the jurisdictions involved or otherwise until the deadline established by said Directive expires without such legislation having entered into force.

 Nonetheless, the lack of domestic legislation implementing the Directive 2005/56/EC does not prevent Italian companies from pursuing cross-border mergers with other limited liability companies, either incorporated within the European Union or elsewhere.

Italian companies, in fact, may utilize different alternative tools, as follows:

(1)   cross-border mergers conducted in compliance with the domestic laws of each merging companies, pursuant to Article 25.3 of the Italian Law no. 218 dated May 31, 1995;

(2)   formation of a European Company by means of a merger, pursuant to the Council Regulation no 2157/2001 and the Directive 2001/86/EC (and the relevant transposition legislation).

1)      Cross-border mergers according to domestic legislations

According to Article 25.3 of the Italian Law no. 218 dated May 31, 1995 (governing the rules of international private law in Italy), mergers among legal entities incorporated under the laws of different States are permitted and shall be effective in Italy, provided that they are carried out in full compliance with the laws of the relevant States where the merging companies are incorporated.

Based on the above, it can be stated that Italian companies may lawfully participate and successfully promote a cross-border merger among two or more legal entities incorporated in different States, even outside the territory of the European Union.

As stated above, the one and only condition of effectiveness of the cross-border merger is that the relevant procedure be carried out in full compliance with the laws of the relevant States involved.

This mainly implies that each merging company shall be required to follow in first instance the procedural rules established by the applicable law in case of merger among domestic companies.

In addition, in order to comply with Article 25.3 of Law no. 218/’95, the Italian common practice has developed a conservative approach, according to which the merger procedure at domestic level shall also include and be consistent with those terms and provisions established by any of the other involved jurisdictions, whenever such terms appear to guarantee a higher degree of protection of those categories of stakeholders generally protected by the merger legislations in place at domestic level, such as minority shareholders, creditors, bondholders and employees. For instance, if one of the jurisdictions involved by the merger establishes a longer term for the bondholders or the creditors to raise objections to the merger, such longer term shall be applied by each of the merging companies, even if at domestic level the relevant mandatory term ordinarily required is shorter. Same example may be made for the legal form of the deed to be executed in case of merger by each merging company.

Of course, the provision of Article 25.3 above only covers the aspect of the legality and effectiveness of cross-border mergers under an Italian standpoint. This means that an overview of the domestic legislations of each of the companies involved in the merger should be performed, so as to verify and confirm that cross-border mergers are allowed in such jurisdictions. It may well happen, in fact, that mergers among companies subject to the laws of different states may be prohibited in certain jurisdictions.

Cross-border mergers achieved through this procedure require significant efforts of coordination among the relevant procedural rules established at domestic level for each merging company, so as to guarantee the full compliance with all of such rules and the maximum degree of protection for all the stakeholders involved in the transaction. Nonetheless, pending the implementation of the Directive 2005/56/EC, this represents the main tool and procedure utilized in Italy in order to perform consolidations among Italian companies and foreign companies.

2)      Formation of a European Company by merger

In addition to the above, an alternative tool to pursue a consolidation among companies subject to the laws of different jurisdictions is the formation of a European Company by means of a merger, introduced by the Council Regulation no. 2157/2001 and the Directive 2001/86/EC.

The above mentioned Regulation and the Directive have for the first time created a new corporate model, aimed at facilitating consolidations among companies incorporated under different Member States.

The European Company can be formed according to four different and alternative procedures, among which the merger.

It should be pointed out though that, unlike the cross-border mergers conducted pursuant to domestic legislations referred to above, the formation of a European Company by merger is allowed to public limited companies only and upon condition that such companies have registered offices and head offices within the Community and that at least two of them are governed by the law of different Member States.

The Regulation 2157/2001 has set forth in detail the procedural rules to be followed in order to form a European Company, as well as the substantive provisions regarding, inter alia, the company’s capital, the corporate governance, the registered office and the domestic treatment of the company within each Member State.

Despite the normal immediate effectiveness of Regulations, Regulation 2157/2001 has entered into force on October 8, 2004, in order to allow each Member State to implement within said term the provisions of Directive 2001/86/EC.

As regards Italy, the implementation legislation has been adopted through the Legislative Decree no. 188 dated August 19, 2005, which has substantially replicated the content of the Directive.

Directive 2001/86/EC governs the matter of the involvement of employees in the formation of a European Company, and has been expressly qualified as an indissociable part of the statute for the European Company. In fact, the failure to comply with such provisions shall prevent the European Company from being registered in the local Registrar of Companies and, consequently, to acquire legal personality.

The primary purpose of the European legislator has been to avoid that the formation of a European Company entail the disappearance or denial of practices of employee involvement existing within the promoting companies.

Without entering into the details of the content of Directive 2001/86/EC, for the purpose of this article it seems sufficient to highlight that it requires the promoting companies to start negotiations with a special negotiating body appointed in representation of the employees, for the purpose of reaching an agreement upon the measures to be taken within the European Company to ensure involvement of the employees. In very general terms, the Directive provides for a minimum mandatory period of six months in order to conclude the negotiations with the special negotiating body, which may cause a significant delay for the completion of the procedure.

For these reasons, cross-border mergers according to domestic legislations are generally preferred to the formation of a European Company, as they seem to allow a significant reduction of the burden relating to the completion of the merger itself, in terms of both costs and timing.

At the same time, it should also be noted that, whenever the merger involves companies subject to the law of Member States which prohibit pursuing this kind of cross-border transactions, the European Company model represents an unavoidable choice at least until domestic legislations implementing the Directive 2005/56/EC will be approved or the deadline established therein shall expire.