5.11 Shares as a Means of Payment 245sets and liabilities of the companies that do not survive the merger are transferred
to the surviving entity. (4) The shares of each non-surviving company are con-
verted into whatever consideration was specified in the merger agreement and the
former shareholders of the non-surviving companies are entitled only to the rights
provided them in the merger agreement or by the governing law.
Company law reasons to merge. There are various company law reasons for
companies to merge. (1) Mergers enable the firm to acquire large companies with-
out compromising its debt-to-equity ratio. Shareholders of the company that will
not survive the merger are entitled to a consideration for their shares, usually
shares in the surviving company. A merger thus enables the firm to pay for a com-
pany through allotment of its own shares. (2) Alternatively, a merger enables
highly leveraged LBOs. The firm can raise debt and pay for the target’s shares in
cash. After the completion of the takeover, those two firms can merge. This means
that the debts will in effect be repaid from the assets of the target. (3) There are
control aspects. Although the main rule is that shareholders of the company that
will not survive the merger will receive shares in the surviving company, the con-
sideration can, depending on the governing law, also consist of cash or other secu-
rities or a combination of shares, cash and other securities. A merger will thus en-
able the firm to manage its share ownership structure. (4) Some reasons relate to
the legal structure of the firm. A merger of two companies after a takeover means
that there will be one surviving company rather than a parent with a subsidiary.
This can simplify the legal structure of the firm, and reduce legal costs. For exam-
ple, cross-border mergers are a means to avoid a layer of national holding compa-
nies. (5) Cross-border mergers also enable the firm to change the place where it is
incorporated and the law governing the company (Volume I).
EU merger law: general remarks. There are many sources of EU merger law.
To begin with, mergers are covered by the freedom of establishment guaranteed
by the EC Treaty. However, there is only piece-meal regulation of mergers at
Community level.
Questions of company law. Questions of company law have been addressed by
several Community instruments. (a) Domestic mergers of public limited-liability
companies (such as the AG or SA) are governed by the Third Company Law Di-
rective.^541 The Third Company Law Directive does not apply to private limited-
liability companies. (b) Cross-border mergers of limited-liability companies are
governed by the Directive on cross-border mergers.^542 That Directive applies to all
companies governed by the First Company Law Directive (all limited-liability
companies) and not just to companies governed by the Second Company Law Di-
rective (public limited-liability companies). The judgment of the ECJ in Sevic Sys-
tems in effect forced Member States to permit cross-border mergers.^543 (c) Some
cross-border mergers are governed by the SE Regulation^544 or the SCE Regula-
(^541) Directive 78/855/EEC (Third Company Law Directive).
(^542) Directive 2005/56/EC (Directive on cross-border mergers).
(^543) Case C-411/03 Sevic Systems [2005] ECR I-10805, paragraph 23.
(^544) Regulation 2157/2001 (SE Regulation).