5.11 Shares as a Means of Payment 241Choice between a merger and a share exchange. In the EU, share exchanges
and mergers raise similar fundamental legal questions. In both cases, the European
legal capital regime with its corporate governance rules means that the transaction
may have to be decided on by shareholders. It may be necessary to apply legal
rules on voluntary bids, mandatory bids, squeeze-out rights, and sell-out rights.
The companies will have to comply with various disclosure obligations. There are
also legal constraints on pricing.
There are nevertheless many differences. (a) As a rule, mergers are always
friendly. A merger requires a merger plan (draft terms of merger), that is, an
agreement between the boards of the participating companies.^523 A share exchange
offer can be friendly or unfriendly, because it does not necessarily require co-
operation by the target’s board. If the target’s board does not recommend the ex-
change offer to shareholders, the bidder can make a hostile offer. (b) A merger
usually requires the consent of the general meeting of the target and the general
meeting of the surviving company.^524 In a share exchange, however, shareholders
of the target accept the offer by selling their shares or refuse the offer by holding
on to their shares. A share exchange is therefore less complicated and faster than a
merger. (c) A merger usually requires a qualified majority at the general meeting
of the target.^525 On the other hand, if that majority has been reached, the surviving
company will obtain full control of the company that will not survive the merger.
In a share exchange, the buyer must take minority rights into account (for block-
ownership, see Volume I). The buyer typically needs a large block of shares be-
fore it can obtain full control of the target. Obtaining full control may require the
use of squeeze-out rights.^526 (d) In a merger, even dissenting shareholders can be
forced to part with their shares under Member States’ national laws. For this rea-
son, company laws tend to provide for dissenter rights. Dissenting shareholders
may be entitled to an appraisal remedy. In a share exchange, dissenting sharehold-
ers cannot always be forced to sell. For this reason, they do not benefit from dis-
senter rights. However, minority shareholders may be forced to sell, if the ac-
quirer’s share of votes or capital exceeds a threshold which triggers a squeeze-out
right. In that case, they will be protected through roughly similar rules as dissent-
ers in a merger.
Mergers v reverse takeovers. A reverse takeover is legally a takeover in which
a company purchases shares in another company and pays for the acquisition with
its own shares. From a legal perspective, the company that takes over the other
company is the company that issues new shares to the owners of the target com-
pany. From a business perspective, the takeover is a reverse takeover, if the tar-
(^523) Article 5(1) of Directive 78/855/EEC (Third Company Law Directive).
(^524) Article 7(1) of Directive 78/855/EEC (Third Company Law Directive).
(^525) Article 7(1) of Directive 78/855/EEC (Third Company Law Directive).
(^526) For example, Article 15 and recital 24 of Directive 2004/25/EC (Directive on takeover
bids).