The legal context of a merger
From a legal standpoint, a merger has the following consequences :
- The universal transfer of the assets and liabilities of the absorbed company to the absorbing company or to a new company;
- The immediate dissolution of the absorbed company;
- The exchange of social rights; however, this compensation may be accompanied by a cash payment up to 10% of the nominal value of the shares issued (article L. 236-1, paragraph 4 of the Commercial Code).
Operations considered equivalent to mergers requiring the involvement of a merger auditor
A merger is the operation defined by the first paragraph of article L. 236-1 of the Commercial Code: “One or more companies may, by way of merger, transfer their assets and liabilities to an existing company or to a new company that they form.” Thus, it can be translated by:
- either the creation of a new company by several existing companies;
- or the absorption of one or more companies by another.
A simplified merger corresponds to the absorption by a company of one or more of its subsidiaries in which it holds all or more than 90% of the capital, in accordance with the provisions of Article L. 236-11-1 of the French Commercial Code.
A split is the division of a company into several parts transferred simultaneously to several new and/or existing companies.
The partial asset transfer is governed by articles L. 236-22 of the Commercial Code for joint-stock companies and L. 236-24 of the same code for limited liability companies. These articles provide that a company that transfers part of its assets to another company and the one that benefits from this transfer may decide by mutual agreement to subject the operation to the legal regime of splits.
The Merger Treaty
The drafting of a merger or split project is mandatory for the or the completion of these transactions according to article L. 236-6 of the Commercial Code.
It is an agreement that binds the parties, subject to approval by their shareholders’ meetings. This agreement specifies all the terms under which the merger, split, or partial asset transfer operation will be carried out, including;
- The reasons for the planned operation,
- The exchange ratio, and if applicable, the amount of the cash payment,
- The expected amount of the merger premium,
- The effective date,
- the rights granted to shareholders with special rights and to holders of securities other than shares, as well as any special benefits.
Distinction Between Completion Date and Effective Date
The legal effective date of the transaction is the date of the last of the shareholders’ meetings approving it, unless the agreement stipulates that the operation takes effect on another date. This effective date cannot be later than the closing date of the current fiscal year of the beneficiary company(ies), nor earlier than the closing date of the last fiscal year closed of the company(ies) transferring their assets (article L. 236-4 2° of the Commercial Code).
This date may :
- correspond to the completion date (qualified as a merger or contribution with immediate effect),
- be later to the completion date (in the case of a deferred merger or contribution), with an effective date no later than the end of the absorbing company’s current financial year;
- be prior to the completion date (qualified as a retroactive merger or contribution).
Tax regime of mergers
In the absence of specific measures, a merger leads to tax consequences similar to those of a business cessation: immediate taxation in the name of the absorbed company of untaxed operational profits, deferred taxation profits (provisions), and capital gains realized during the contribution to the absorbing company, as well as the taxation of the merger premium in the name of the shareholders of the absorbed company as distributed income. In this regime, the absorbing company receives a tax-exempt contribution and has no commitments to assume in the contribution agreement.
A “favorable regime,” provided for under Article 210 A of the French General Tax Code (CGI), is applicable optionally and subject to certain conditions. It eliminates any additional taxation related to the merger in the absorbed company. Thus, in the absorbed company, capital gains and provisions that retain their purpose are exempt from corporate income tax at the time of the merger.
Article 210 B of the CGI allows, under certain conditions, partial asset contributions to be placed under the special merger regime, a solution that ensures the same neutrality as recognized in mergers.
Valuation of contributions and exchange parity
In the context of mergers or similar operations, determining the exchange ratio and valuing contributions are crucial. The necessity to consider actual values affects the calculation of the exchange ratio to be retained in the agreement.
The exchange ratio corresponds to the number of shares the beneficiary company must issue in remuneration for a contribution. It is determined based on the exchange ratio or parity.
Accounting provisions require that the values of contributions be transposed into the accounts of the beneficiary company, respecting either real values or book values, depending on the nature of control between the entities and the direction of the operation.
- Contributions made “right-side-up” between companies under distinct controls must be accounted at their real value,
- Contributions made “upside-down” between companies under distinct controls must be made at book value,
- Contributions made between companies under common control, regardless of the direction, must follow the book values of the transferred assets.
An exception concerns the spin-off operations of a business unit that result in a loss of control; these operations must be accounted for at real values.
Moreover, when the net asset contributed is insufficient to cover the capital of the beneficiary company, real values must be used for the valuation of the contributions, provided that the net asset is positive and the contribution benefits a company with a pre-existing activity.
Merger bonus and mali
In the event of the absorption of a company in which the absorbing company previously held shares, the merger surplus or loss corresponds to the difference between the book value (net of depreciation) of the holding in the absorbing company and the net assets received by the absorbing company in proportion to its percentage holding in the absorbed company.
A merger bonus is a positive difference between the net assets received by the absorbing company, corresponding to its ownership stake in the absorbed company, and the book value of this ownership.
The bonus is recognized in the financial results for the proportion of accumulated and undistributed earnings by the absorbed company since acquisition, and in equity for the residual amount.
The merger loss can be broken down into two elements:
- A technical loss (generally concerns mergers or sole proprietorship conversions evaluated at book value) when the net value of the absorbed company’s shares on the balance sheet of the absorbing company exceeds the contributed net book assets. This component of the goodwill corresponds, to the extent of the previously held stake, to latent gains on the contributed assets whether recognized or not in the accounts of the absorbed company.
- The “true” loss corresponding to the balance (difference between merger goodwill and technical goodwill), which can represent an additional depreciation of the stake held in the absorbed company.
The “true” loss is recorded in the expenses of the absorbing company in its financial results. The technical loss is recorded as an asset on the balance sheet of the absorbing company in the “goodwill” section, under an account titled “merger goodwill”.
Simplified Merger
When the absorbing company holds, from the filing of the merger project at the commercial court registry and until the completion of the merger, the entirety of the capital of the absorbed companies, this operation does not lead to an increase in capital, and the extraordinary general meeting of the absorbing company decides based on the report of a contribution auditor.