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Regulation of Mergers as a Tool for Rationalising Costs in the Economic Crisis
A merger of Slovak limited liability companies and an up-stream merger (of a mother and a daughter companies) of Slovak joint stock companies can be much easier than one might first think, and the benefits can significantly outweigh the costs. Mergers are perceived as an instrument that is most commonly used during economic growth. But in specific situations it can also be a useful instrument during an economic downturn.
Mergers of limited liability companies and related companies
Many foreign investors end up, after several acquisitions in Slovakia , with two or more companies, most commonly limited liability companies, with the investor having a majority or total participation. The positive effects of merging such companies are well-known: reducing costs, increasing efficiency, simplifying and slimming the management structure, eliminating the duplicity of certain services, and eliminating the costs of intercompany relationships (loans, etc.)
Investment managers, however, may often be discouraged from mergers because of the time and costs involved. This may be a realistic expectation in mergers of separate (unaffiliated) joint stock companies or cross border mergers.
Yet, by merging limited liability companies (and by up-stream mergers of joint stock companies) many administrative burdens can be avoided.
Although from the legal point of view such mergers can appear quiet simple, it is necessary to ensure the assistance of an accountant and a tax consultant, as any merger has important consequences in these fields.
Basic legal steps in a merger
We briefly describe the most important legal steps to be taken in a merger, with particular emphasis on mergers of limited liability companies and on 100 percent up-stream mergers of joint stock companies.
Initially, reviewing the internal regulation of all participating companies is necessary to determine whether there are any internal restrictions on the merger. It is recommended that the companies inform their commercial partners of the merger so that they can prepare to issue all invoices to the successor of the merged companies.
It is also important to take into account the change of control clauses (such as the obligation to obtain a contractual party’s prior approval with the change in ownership) as serious obstacles can arise preventing further progress in the merger.
Subsequently, for the purposes of the merger, a detailed documentation should be worked out.
A preliminary matter is to prepare the extraordinary financial statements of the merged companies. Timing may save some costs here. If a merger is planned within six months of the end of the merged companies’ financial year they may be spared the need to prepare extraordinary financial statements.
The most important document in a merger is the merger agreement. The draft should be prepared with all the participating companies’ involvement and subsequently approved by the general meetings. Approval may not be necessary in 100 percent up-stream mergers.
Unlike in other mergers the draft merger agreement need not be audited in mergers of limited liability companies (unless at least one of the shareholders requests auditing) and in up-stream mergers. A merger agreement must take the form of a notarial deed and be signed by the members of the statutory bodies of all participating companies.
An executive report on the merger need not be drafted if no party to the merger of limited liability companies requires it. Neither is a report necessary in 100 percent up-stream mergers.
The merging companies to be wound-up by the merger cannot ignore their employees, as they are obliged to notify employees of the merger and its effects on them not later than one month before the merger will occur.
In a merger one should not forget the obligations imposed by Slovak competition law. If certain conditions are met the merging companies must notify the Antimonopoly Office of the merger. In general, as no change of control takes place in a merger inside an economic group, there is no need to apply for the Antimonopoly Office’s approval. This may save several months of preparing necessary documents and waiting for clearance from the Antimonopoly Office.
Finally, after all formalities are fulfilled, the merging companies can apply to register the merger with the Commercial Register. As a result, the merger becomes effective on the date it is registered in the Commercial Register.
From the accounting point of view it is important to say that the successor company must account for the equity acquired from the other merging companies at its market value (determined, for example, by an expert opinion).
Merging companies must prepare financial statements to the date they are dissolved and notify the merger to the necessary authorities and their commercial partners.
Conclusion
Although mergers are known as one of the most complex and time and money consuming legal operations there are significant advantages for related companies in planning an up-stream merger, or even in a merger of unrelated limited liability companies. The whole procedure is much easier and can present a useful way of rationalising a company’s costs during an economic crisis.
Jan Makara
Attorney at Law
This article is for information purposes only. Should you need any further information on the issues addressed in this article, please contact PETERKA & PARTNERS Law Offices.
PETERKA & PARTNERS law office
Kapitulska 18/A, 811 01 Bratislava, Slovakia
Tel. +421 (2) 544 18 700 Fax +421 2 544 18 701
E-mail: office@peterkapartners.sk