5.11 Shares as a Means of Payment 247any taxation of capital gains calculated by reference to the difference between the
real values of the assets and liabilities transferred and their values for tax pur-
poses.^555 Where the receiving company has a holding in the capital of the transfer-
ring company, any gains accruing to the receiving company on the cancellation of
its holding shall not be liable to any taxation.^556
Merger Process
If the participating companies are limited-liability companies incorporated in the
EU, the merger process is to a large extent based on the provisions of those Com-
munity instruments. Like all business acquisitions, it will also be influenced by
commercial practice.
Competent authorities. In a purely domestic merger, the competent authorities
are determined by that Member States’ national law. In a cross-border merger,
more than one Member States’ authorities may have jurisdiction: authorities in the
country whose laws govern the entity that will not survive the merger; authorities
in the country whose laws govern the entity that will survive the merger; and au-
thorities in the country whose laws govern the entity that is formed by merger.
Commencement of negotiations, management of information. Mergers are
friendly. The commencement of negotiations will be complemented by the con-
clusion of agreements that protect confidentiality on one hand and reduce the risk
inherent in investment in the production of information on the other.
The parties will therefore conclude non-disclosure agreements. If one of the
parties is a listed company, project-specific insider lists must be prepared (section
12.2). The parties may also undertake obligations to negotiate in good faith and
various kinds of exclusivity obligations (section 12.4).
If that contractual framework is in place and the parties still want the transac-
tion, the parties will move to the next level in the legal framework.
Moral obligations, due diligence. The next step is to ensure that the legal
framework makes it possible to disclose more confidential information to the other
party. For example, the parties may sign a letter of intent. The letter of intent will
set forth the proposed structure of the deal. According to its wording, it will not
create any obligation to conclude the transaction. However, it will create a moral
obligation. It provides a framework and context for further negotiations and due
diligence (see section 12.3, Chapter 13, and Volume II).^557
Draft terms of merger (merger plan). If the parties want to go on with the
transaction, the parties must draw up the common draft terms of merger (a merger
(^554) Directive 90/434/EEC on the common system of taxation applicable to mergers, divi-
sions, transfers of assets and exchanges of shares concerning companies of different
Member States.
(^555) Article 4(1) of Directive 90/434/EEC.
(^556) Article 7(1) Directive 90/434/EEC. Article 7(2) provides: “The Member States may
derogate from paragraph 1 where the receiving company’s holding in the capital of the
transferring company does not exceed 25%.”
(^557) See Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003)
p 174.