The Maltese Companies Act (Chapter 386 of the Laws of Malta) contemplates two types of mergers - the first is a merger by formation of a company, and the second is a merger by acquisition, which shall be referred to simply as ‘acquisition’.
Merger by formation and Merger by acquisition
A merger by formation of a company may be defined as an agreement through which two or more companies merge together to become a single company that did not exist prior to the merger. On the other hand, an acquisition means that one company is absorbed into another company. In both processes, the companies merging to form a new company or the company being acquired shall be dissolved once the merger or acquisition is complete.
In the case of mergers forming a new company, everything is pooled into the new company, however when one company acquires another it is possible for the company not to dissolve the other, but purchase enough share power in order to effectively gain control. The approach which directors may employ naturally depends on the purpose of the endeavour, and therefore there is no single standard approach.
What are the different forms?
Mergers, whether by forming a new company or through acquisition, do so tactically through either horizontal integration, vertical integration or conglomerate merging.
Horizontal integration refers to when companies merge at the same stage of production, that is, companies which both produce clothing merge together in order to, for example, take advantage of the economies of scale. (Economies of scale refers to situations in which there is a decrease in cost to produce a single unit of product due to a larger scale production).
Vertical integration refers to merging at different points of production. An example of such would be a company which sources cotton for clothing, merging with a company which produces clothing. This is another way in which companies strive to reduce production costs for their products.
Conglomerate merging has a different rationale from horizontal and vertical integration. In this case, companies merge from entirely different sectors, such as a company producing sportswear merging with a company which produces stationery products. The rationale in this case naturally depends on the sector being considered and the desirability of the products being produced.
In order to be effective, a merger or concentration must necessarily take place in writing. There are a number of matters that must be included in the draft terms of the merger as indicated in Article 344 of the Companies Act. These include the name and registered offices of both companies, their status, the share exchange ratio and any cash payment that may be involved, the date when the accounts shall be treated as of the acquiring company or of the new company as the case may be, and the date on which shareholders may participate in the profits of the company. Such draft terms are to be forwarded to the Registrar of Companies who shall be duty bound to register such draft terms.
One month following the publication of the draft terms of merger, it shall be possible for the amalgamating companies to vote during an extraordinary resolution in order to approve the amalgamation. During the month preceding the general meetings, shareholders are entitled to inspect the documents such as the draft terms of the merger, the annual accounts and the reports of directors and experts. The amalgamation may then take place after the lapse of three months following a publication of the extraordinary resolution accepting the amalgamation. This three-month period allows for creditors companies to oppose the amalgamation.
The Companies Act specifies a number of other acts and details that must be performed or taken into account. Directors’ and expert’s reports are to be drawn up detailing the draft terms of the merger as per Articles 346 and 348. It is also possible for the companies to request the Registrar of companies to appoint an independent expert or experts in order to provide a report for both companies jointly. Individuals holding securities in the companies are also offered protection in Article 352.
The Companies Act however is not the only source relating to amalgamations. The Control of Concentrations Regulations Subsidiary Legislation (S.L.) 379.08 to the Competition Act specifies how amalgamations are to be dealt with. The term “concentration” refers to mergers and acquisitions, where the defining element of an acquisition is “the acquisition by one or more undertakings or by one or more persons already controlling at least one undertaking”. In order to fall within the remit of the subsidiary legislation, the financial specifications in Article 2 must be met. Article 4 of the S.L. also prohibits any concentration which may result in a “substantial lessening” of competition within the Maltese market.