248 5 Equity and Shareholders’ Capital
plan). The draft terms will be approved by the boards of the participating compa-
nies.^558 As the merger requires the consent of the general meeting, the draft terms
can be described as a conditional contract that will become binding provided that
the merger is approved by the general meeting. The draft terms will contain much
of the information that must be disclosed to sharereholders.
Filing of basic information about the merger. For each of the merging compa-
nies, basic information about the proposed merger must be filed with the compa-
nies register and published in the national gazette.^559
Obligations to take corporate action v material adverse change. After the ap-
proval of the merger plan, the outcome of the merger process will be in the hands
of the shareholders. There is thus a risk that the other party fails to take the neces-
sary corporate action. The board of a participating company can mitigate that risk
by means of exclusivity clauses and clauses on liquidated damages. The parties
may also agree on a break-up fee.
As it can take months to finalise the merger, the parties often mitigate the risk
of changing circumstances through the inclusion of a material adverse change
clause. That clause can be complemented by a break-up fee clause (section
12.4.2).
If the distribution of power between different corporate bodies is, as in conti-
nental Europe, governed by mandatory provisions of company law, the board is
more likely to be prohibited from frustrating the general meeting’s (or the supervi-
sory board’s, as the case may be) right to decide on the merger. There are there-
fore constraints on the use of liquidated damages and break-up fees. For example,
the duty to pay a large break-up fee or a large amount as liquidated damages in the
event that the general meeting votes against the merger would, in practice, make it
more difficult for shareholders to decide on the merger on its merits.
On the other hand, it is in the interests of both parties to agree that failure to
take the necessary corporate action will trigger some sanctions. Without such
sanctions, it would be riskier to disclose information to the other party and to
commence the merger process. Even if the parties had agreed on non-disclosure
agreements, information disclosed by a party in the course of the merger process
would be likely to benefit the other party should the merger fail. In addition, both
parties will incur costs in the course of the merger process. It would be unwise for
a participating company not to ensure that it will be reimbursed for the harm
caused by the disclosure of information to the other party and the costs that it has
incurred.
Disclosure of information to shareholders. Shareholders need plenty of infor-
mation in order to be able to decide on the merger. The questions that interest
shareholders the most are the legal validity of the transaction and compliance with
(^558) Article 3 of Directive 78/855/EEC (Third Company Law Directive); Article 5 of Direc-
tive 2005/56/EC (Directive on cross-border mergers); Article 20 of Regulation
2157/2001 (SE Regulation).
(^559) Article 6 of Directive 78/855/EEC (Third Company Law Directive). See also Article 6
of Directive 2005/56/EC (Directive on cross-border mergers); Article 21 of Regulation
2157/2001 (SE Regulation); Article 24 of Regulation 1435/2003 (SCE Regulation).