5.11 Shares as a Means of Payment 2395.11.3 Mergers and Share Exchanges
General Remarks
In an acquisition, the company can turn to the target’s shareholders instead of its
own shareholders. Mergers and share exchanges are important ways to finance
takeovers. Share exchanges are often used in public takeover bids.
Terminology. The terms “merger”, “acquisition” and “takeover” tend to be used
interchangeably in business practice. For example, the “EC Merger Regulation” is
the basis of European “merger control”.^518
In EU company law, however, the term “merger” means a procedure whereby
two or more separate legal entities combine to form a single entity.^519 In company
law, this term does not mean the acquisition of a company through the purchase of
its shares or assets. Company law provisions on mergers tend to be complemented
by provisions on squeeze-out rights and sell-out rights.
Domestic v cross-border mergers. Mergers can be domestic or cross-border. In
a domestic merger, both legal entities are incorporated in the same country and
governed by the laws of the same country. A domestic merger is legally less com-
plicated than a cross-border merger.
In a cross-border merger, the participating legal entities are incorporated in dif-
ferent countries and governed by the laws of different countries. A cross-border
merger cannot be executed exactly in the same way as a domestic merger, unless
there is uniformity of law across borders. Apart from countries like Spain and Por-
tugal, Member States’ traditional company law rules used to prohibit cross-border
mergers in order to protect creditors and shareholders. Company laws used to ad-
dress only the domestic side of a merger.
Mergers v takeover bids. There is a distinction between a merger offer and a
takeover bid. A takeover bid can consist of an offer to buy shares for cash, an offer
to allot shares in exchange for shares in the target company, or a merger offer. If
successful and the offeror’s holdings trigger squeeze-out rights, a takeover bid will
often be followed by a short-form merger. The use of a triangular structure (sec-
tion 11.2) typically leads to the merger of the acquisition vehicle and the target
company.
An all-cash takeover bid (tender offer) can be faster in comparison to the one-
step merger or a share exchange offer. On the other hand, target shareholders have
no obligation to accept the offer.^520
Mergers v share exchanges. There is also a distinction between mergers and
share exchanges. A share exchange means that the acquirer issues shares in ex-
change for shares in the target company. If a sufficient number of shares are ex-
changed, the target will become a subsidiary of the acquirer. A share exchange
(^518) Regulation 139/2004 (EC Merger Regulation).
(^519) See Articles 3 and 4 of Directive 78/855/EEC (Third Company Law Directive) and Arti-
cle 2 of Directive 2005/56/EC (Directive on cross-border mergers).
(^520) See Cole J Jr, Kirman I, Takeover Law and Practice. In: PLI, Doing Deals 2008: Under-
standing the Nuts & Bolts of Transactional Practice. New York City (2008) pp 129–130.