Using a merger to simplify group structure and make business more efficient
Has your company grown to the point where it has several direct subsidiaries or an otherwise diverse group structure consisting of various sister companies, associated companies, and other related companies? For example, a group may have grown through acquisitions in which the parent company of the group has acquired several companies that are focusing mainly on the same business as the parent company but have continued to operate as separate companies after the transaction. Often the members of the boards of directors and the CEOs of the companies in the group are the same people, and running several companies creates a lot of administrative work and may reduce the efficiency of the business itself.
In situations where a group includes several different companies, the possibility of lightening the company structure and thus reducing the administrative measures that are compulsory for the companies in the group may be considered during the springtime when the annual accounts are drawn up. The existence of several companies in a group leads to additional work and costs for the group as each group company must have its own accounts, which must be approved separately for each individual company. Decision-making for each group company is carried out separately in each company, which may reduce the efficiency of business management.
A merger is one way of simplifying, streamlining, and improving the efficiency of the group structure, thereby reducing the administrative burden and costs for the different companies. A merger is a business arrangement whereby the assets and liabilities of one or more companies (the merging company) are transferred to the acquiring company, and the shareholders of the merging company receive shares, cash, or other assets or liabilities of the acquiring company as merger consideration. There are also mergers where no merger consideration is paid at all. Mergers are often carried out after an acquisition by merging the acquired company with the acquiring company.
The merger must be carried out in accordance with the provisions and deadlines of the Finnish Limited Liability Companies Act, and a successful merger project requires careful planning in advance. The merger project itself, with all its stages, usually takes about 5–6 months. The merger involves several deadlines that must be strictly observed, and it is therefore advisable to consider the deadlines and the timetable for the entire project from the very beginning of the merger planning.
Different forms of merger
A merger takes different forms depending on the companies involved and the ownership structure of the merging companies. Under the Limited Liability Companies Act, a merger can take place by one or more merging companies merging into a receiving company (absorption merger) or by two or more companies merging to form a receiving company (combination merger).
The most common form of merger within groups is the merger of subsidiaries, which is one of the forms of an absorption merger. In a subsidiary merger, a subsidiary merges with its parent company, which owns all the shares and any special rights attached to the shares of its subsidiary. Another common form of group merger is the affiliated company merger, whose definition was only recently added to the Finnish Limited Liability Companies Act, although these absorption mergers were already taking place before the Act gave its own definition to this type of merger. According to the definition in the Limited Liability Companies Act, an affiliated company merger is an absorption merger without consideration where a natural or legal person owns, directly or indirectly, all the shares of the merging companies, together with any option rights and other special rights attaching to the shares.
The amendment to the Limited Liability Companies Act that entered into force on January 31, 2023, brought similar relief to affiliated company mergers as previously applied only to subsidiary mergers. Examples of these include the fact that only a limited auditor’s statement is required for affiliated company mergers, as in the case of subsidiary mergers, and the fact that decision-making can take place in the company’s Board of Directors instead of the decision to require a shareholders’ resolution.
The different stages of a merger
The merger process of a limited liability company consists of four stages: drawing up the merger plan, filing a notice to creditors, implementing the merger, and issuing the final account.
The preparation of a merger starts with the companies involved in the merger drawing up a merger plan, which describes the detailed way in which the merger is to be implemented. The merger plan must include, inter alia, information on the reasons for the merger, any changes to the articles of association of the acquiring company, the merger consideration, option rights, and any other special rights of the merging company or special advantages and rights to be granted in connection with the merger. An important part of the merger plan is a statement of the assets, liabilities, equity, and intended effect of the merger on the balance sheet of the acquiring company, as well as the accounting method to be applied in the merger.
Furthermore, the merger plan must include an explanation of any business mortgages between the merging companies. If both the merging company and the acquiring company have business mortgages, the order of priority between them must be clarified, and a separate application must be made to the Trade Register before the merger can proceed to its third stage, i.e., the registration of implementation. The merger plan should also include information on the planned implementation date of the merger, which should consider the fact that the second phase of the merger, applying for the notice phase, usually takes about 3–4 months, depending on the processing times of the Trade Register.
According to the Finnish Limited Liability Companies Act, the merger plan must be filed for registration within one month of the date on which it was signed. The notification must be accompanied by an auditor’s report in which the auditor assesses whether the merger plan provides correct and sufficient information on the basis and allocation of the merger consideration and whether the merger will jeopardise the payment of the acquiring company’s debts. In the case of a merger of subsidiaries or affiliated companies where the merger consideration is not paid, it is sufficient for the auditor to express an opinion only on whether the merger is likely to jeopardise the payment of the acquiring company’s debts.
The second stage of the merger is to apply for a notice to the merging company’s creditors whose claims against the company arose before the merger plan was registered. On application by the merging company, the Trade Register issues a notice to the merging company’s creditors, giving creditors the opportunity to oppose the merger by notifying the Trade Register on the date specified in the notice. The deadline for filing the notice is one month after the registration of the merger plan and if the notice is not filed by the deadline, the merger will lapse. Normally, the application for a notice to creditors is filed with the Trade Register at the same time as the registration of the merger plan. In addition to applying to the Trade Register for a notice, the company is also required by the provisions of the Limited Liability Companies Act to send a written notice one month before the deadline for the notice to its known creditors whose claims arose before the registration of the merger plan.
In the third phase of the merger, the implementation phase, a shareholders’ resolution, or a board resolution on the implementation of the merger must be adopted within four months of the registration of the merger plan, again under the threat that the merger will lapse. In the merging company, the decision to merge is in principle taken by the shareholder, but in the case of mergers of subsidiaries and affiliated companies, the decision-making body is the board of directors. In the acquiring company, the decision to merge is taken by the board of directors.
The implementation of the merger must be filed for registration in the Trade Register by the merging companies no later than six months after the merger decision, again under the threat that the merger will lapse. The notification of the implementation of the merger to the Trade Register must be accompanied by a declaration by the members of the boards of directors and the managing directors of the merging companies that they have complied with the provisions of the Limited Liability Companies Act and a certificate by the members of the board of directors and the managing director that the company has sent the notifications described above to its known creditors in accordance with the Limited Liability Companies Act. At the stage of implementation of the merger, the notification to the Trade Register must also be accompanied by an auditor’s certificate that the merger has complied with certain provisions of the Limited Liability Companies Act.
The registration of the implementation of the merger can be carried out if the creditors have not opposed the merger or if the creditors who have opposed the merger have received payment or security for their claim by virtue of a court judgement. At the time of registration of the completion of the merger, the assets and liabilities of the merging company are transferred to the receiving company without liquidation, and at the same time, the merging company is dissolved and the receiving company is created in the case of a combination merger.
In the last fourth phase of the merger, the board of directors and the managing director of the merging company must, as soon as possible after the merger is implemented, prepare the financial statements and the report on the activities of the company for the period for which the financial statements have not yet been presented to the general meeting (final accounts). If the company has an auditor, the final accounts must be submitted to the auditor for an audit report. Once the annual accounts and the audit have been completed and approved, the final accounts must be filed for registration with the Trade Register, after which the merger is completed in its final stage.
In summary, the implementation of a merger requires planning, scheduling, and strict compliance with several provisions of the Limited Liability Companies Act. If done correctly, a merger is an effective way to simplify the group structure, reduce administrative costs, and improve business efficiency.
We assist our corporate clients in all phases of a merger, from merger planning to the preparation of the final accounts. In addition to the scheduling and drafting of merger documents, we also assist clients with a wide range of other corporate matters such as mergers and acquisitions.