Intra-Group Mergers

Mergers are generally regarded as means for companies to consolidate their businesses with the main purpose to position themselves more favorably against stronger competition. Others often use a merger to establish themselves as a dominant force on a national and supranational level. Intra-group mergers, on the other hand, provide a tool for groups of companies to make their structures and businesses more efficient, whether that be in terms of production, cost allocation or channeling of resources or even funding and financing. It is often a tool overlooked, however, under the right circumstances, it can be the best solution to a group’s restructuring of its assets and commercial activities.

Intra-group mergers fall under the ‘reorganization’ provisions that are contained in the Companies Law[i].

Mergers can take place either on:

(i) national level (intra-border) between two Cyprus companies; or

(ii) cross-border level with one entity being a Cyprus company and another being a foreign jurisdiction company existing in another EU member state.

Mergers can even take place with multiple entities simultaneously, meaning that more than two companies may reorganize in such a way where there is only one entity surviving and the other ceases to exist. The Companies Law states among others that:

in respect of a plan for the reorganization of any company or companies or for the amalgamation of any two or more companies, and that in accordance with the plan all or part of the business or property of the company affected by the plan… is to be transferred to another company…[i]

There are plenty of scenarios where mergers and reorganizations are used to reorganize companies within a group of companies as it is considered an efficient way for the group to minimize its costs, footprint and consolidate its assets while often proving to be the most tax-efficient process to accomplish this. A few scenarios are examined below:

Scenario 1: a parent company and one (or more) subsidiary company merge in order for the parent company to assume all assets and liabilities of the subsidiary company. This is the most common merger – by ‘absorption’ – where essentially the subsidiary company is absorbed by the parent company.

Scenario 2: two companies are merged into a separate company, more often being a newly established company, where all the liabilities and assets of the companies are transferred to the newly established company (the surviving entity) and the merging companies cease to exist.

Scenario 3: a company transfers part(s) of its assets or commercial activities to a new group company with the purpose of separating them allowing them to focus and grow each business in their own separate way and following separate strategies or financing arrangements – commonly referred to as a ‘spin off’.

Cross-Border Mergers

Following recent European Union legislation[i] which in turn has been ratified and incorporated in the Cyprus Companies Law[ii], cross-border mergers and reorganizations are now streamlined within the EU. It will now be much easier for Europe’s companies to cooperate and restructure themselves across borders. The legislation, on EU level, sought to harmonize the procedures among member states in order to simplify the process of mergers, conversions and reorganizations. We note however that in practical terms and specifically referring to Cyprus, the procedures have not been affected to a significant extent. For practitioners, as far as Cyprus is concerned, merger procedures remain mainly unchanged and practically the newly introduced legislation follows the former applicable provisions of the Companies Law on mergers and reorganizations on cross-border level with some refinements adding uniformity and efficiency to the procedures.

Main Elements of Merger Execution

Merger Plan

The main requirement for carrying out a merger, whether that be an intra-border or cross-border one, is the preparation of a merger plan by the board of directors of the merging entities. Such plan is considered the backbone of the procedure, since it constitutes the basis and lays out the provisions by which the merger will be executed and which will be the end product of such reorganization.

A merger plan, depending on the merger type, should consist of:

• Details of the Merging Companies and Effective Date of the Merger
• Share Exchange Ratio and Terms of Allotment of Shares
• Treatment of Shares Held by the Merging Companies
• The Memorandum and Articles of Association of the Surviving Entity
• Employee Participation and Safeguards
• Accounting Date and Merger Accounts
• Impact on Creditors and Details of Valuation of Assets and Liabilities
• Information on Transfer of Assets and Liabilities

Approval of the Merger

The shareholders of the merging companies need to approve the merger plan and the reorganization in order for the reorganization to commence.

Following the shareholders’ approvals, the merging companies can apply to the court to obtain the court’s approval for the completion of the merger. The court will examine the legality of the merger and the impact on creditors prior to the issuance of a court order for the merger to proceed. For intra-group mergers, the merging companies will finally need to submit the court order with the merger plan to the Registrar of Companies for the merger to be registered and enter into effect. On a cross-border level, each entity applies to the appropriate local court for approval and registers the court order with the local registrar/authority. In the case of an entity that ceases to exist, the local authority will issue a pre-merger certificate to be used for finalizing the merger process at the member state of the surviving entity.

Financial Aspects of the Merger

The merging companies will need to prepare merger accounts based on which the merger will take place. The existence of creditors will need to be taken into account and dealt with accordingly whether through the introduction of guarantees against possible claims or obtainment of consents, depending on the case.

 Employment Provisions

Where the merging parties have employees, special provisions will need to be introduced in the merger plan and as the case may be, the merger parties may need to undertake additional actions concerning the existing employees of the merging companies.

Effect of the Merger

Following obtainment of all necessary approvals the merger is registered with the Registrar of Companies (or equivalent commercial registry) and enters into effect in accordance with the court order that is issued by the court of the member state of the surviving entity.

GIORGOS LANDAS LLC offers comprehensive services, including company mergers and reorganizations, and can assist with any other matters related to your corporate and commercial endeavors. For more information, please visit our website or contact us via email at info@landaslaw.com.

[1] Companies Law, Cap. 113 of the Republic of Cyprus.

[1] Section 200 of the Companies Law.

[1] Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (Text with EEA relevance).

[1] The Companies (Amendment) (No. 3) Law of 2024.