Merger

A merger is the combination of two companies into one unit. Either both merge into a new company or one is absorbed into the other. The goal is to be stronger together than the companies would be individually.

Legally, mergers in Germany are governed by the transformation act and take place either by absorption, where one entity is transferred into an existing one, or by formation of a new entity. Universal succession is the defining feature: all assets, contracts and liabilities transfer by operation of law without each counterparty having to consent, which is the substantial practical advantage over an asset deal. Required are a notarised merger agreement, a merger report, shareholder resolutions with a qualified majority and registration in the commercial register, upon which the merger takes effect. Protective provisions for creditors and employees are added, in particular information duties and co-determination rules.

In market usage the term is broader than in law, since many transactions described as mergers are in fact takeovers in which one side gains control. The language of a merger of equals then serves communication towards employees and the public. Above certain size thresholds the combination must be notified to the competition authorities and may not be completed before clearance. Valuing the entities involved is essential in practice, because it determines the exchange ratio at which the transferring entity's shareholders receive shares in the absorbing one. That ratio is the most frequent point of dispute and can be reviewed by shareholders in court. Tax consequences also deserve attention, because under certain conditions a merger can be carried out at book values and therefore without realising hidden reserves, but otherwise triggers substantial tax liabilities.

Note: This explanation is for general information only and does not constitute tax or legal advice. The tax and legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified tax adviser or lawyer.