What is the process of mergers and acquisitions?
The RA Civil Code provides for the following types of reorganization of legal entities: separation, division, merger, acquisition and restructuring. Mergers and acquisitions are among the most common forms of reorganization of legal entities. In the case of a company merger, two or more legal entities cease to exist and instead create a new legal entity together. Meanwhile, as a result of an acquisition, one or more companies cease to exist by merging with another already existing company.
Legal succession necessarily takes place in such corporate actions. In particular, all the rights and obligations of the companies are transferred to the newly created or already existing legal entities in accordance with the transfer act.
Company reorganization processes are regulated by the Civil Code of the Republic of Armenia, and depending on the organizational legal form of the company, also by the Laws of the Republic of Armenia “On Limited Liability Companies” and “On Joint Stock Companies”. Discover additional insights on these organizational forms by reading more here.
How is the merger and/or acquisition decision made?
The decision on reorganization in the form of merger/acquisition must be made at the general meeting of each of the companies involved in the process. This meeting also approves the merger/acquisition agreement, the transfer act, the procedure and conditions for acquiring/merging, as well as the procedure for converting shares and securities of companies into the shares/securities of the new company (in case of merger) or shares/securities of the existing company (in case of acquisition).
What is the content of the merger/acquisition agreement?
The merger/acquisition agreement is the main document that regulates the joint activity between two or more companies until the state registration of the corporate transaction. In particular, according to the provisions of Articles 50.6 of the RA Law “On Limited Liability Companies” and Article 24 of the RA Law “On Joint Stock Companies”, the merger (acquisition) agreement is concluded between the companies participating in the process of merger (acquisition), is signed by the head of the company’s executive body and is subject to approval by their general meetings. It should contain:
- company name, legal address, and state registration data of participating companies;
- the terms, procedure and conditions of the merger (acquisition);
- the procedure for exchanging shares/securities and other securities of the merging (joining) company in a formula or other standard form;
- the procedure and conditions for receiving dividends for the shares/securities of merging (joining) companies;
- the voting procedure in the joint meeting;
- the term of convening the joint meeting of the companies participating in the merger (acquisition), and the procedure for inviting and holding it.
These are the information that must be included in the merger or acquisition agreement according to the law, but the parties are free to add other information at their discretion.
Our team is ready to assist in the implementation of these types of reorganization by providing you with comprehensive legal services. In particular:
- preparation of the necessary document package for the merger/acquisition of companies,
- assessment of compliance with the legislation of merger/acquisition processes of companies,
- full support within the declaration of concentrations,
- consulting on transactions, as well as protection of the client’s interests in the relevant bodies.
What is the transfer act?
The transfer act confirms all the assets and liabilities which, in the case of a merger or acquisition, are transferred to the newly created company (in the case of a merger) or to the company expanding as a result of the acquisition.
What issues are decided during the joint meeting of the companies participating in the merger and acquisition?
The issues discussed during the joint general meeting differ depending on the type of reorganization taking place, considering their specificities caused by the termination of the companies’ activities.
The joint general meeting of the shareholders of the companies participating in the merger is considered the founding meeting of the company created as a result of the merger, which is convened within the terms and by the body specified in the merger agreement and adopts decisions on issues discussed during the establishment of the companies. In particular, approval of the charter, charter capital, results of placement of securities, election of management bodies of the company, etc.
Meanwhile, in case of the acquisition, the joint general meeting of the shareholders of the expanding company and the shareholders of the joining company adopts decisions on making the necessary amendments to the charter of the expanding company, approving the acquisition agreement and the transfer act.
What other requirements are submitted regarding the merger and acquisition processes of companies?
To protect the rights and legal interests of creditors of legal entities in this process, the RA Laws “On Limited Liability Companies” and “On Joint-Stock Companies” have provided for the obligation for companies to notify their creditors about the merger/acquisition. Creditors have the right within 30 days from the moment of receiving such notification to demand additional guarantees for the fulfilment of their obligations or to terminate the reorganization (merger/acquisition) or early fulfilment obligation and to compensate damages.
Is it necessary to get permission/decision from any government body for the merger and/or acquisition of the companies?
In the process of merger/acquisition of companies, it may be necessary to obtain the permission of the Commission for the Protection of Competition (hereinafter referred to as “the Commission”), considering that in some cases there may be a risk of concentration of business entities hindering free economic competition.
According to Article 13, clause 1 of RA Law “On Protection of Economic Competition” (hereinafter referred to as “the Law”), the concentration of business entities is considered:
1) Merger of business entities registered in the Republic of Armenia.
2) Acquisition of business entities registered in the Republic of Armenia.
Moreover, according to clause 8 of the same article the acquisition or merger of business entities will be considered as a concentration in the event that it is carried out:
1) in the same product market (horizontal concentration),
2) in different product markets with certain interconnections (vertical concentration),
3) in different product markets (mixed concentration).
In other words, a merger or acquisition of business entities will not be considered a concentration in itself, if it is not implemented in the same product market or different product markets with certain interconnections or in different product markets.
Moreover, regarding the reorganization of financial organizations, it is only allowed to carry out an acquisition of a financial organization, which is controlled by the Central Bank of Armenia.
What kind of control does the Commission carry out in case of concentration?
Pursuant to Article 15 of the Law, concentrations implemented between business entities are subject to declaration in the event of requirements provided for by the Law and by the Commission, in particular when:
- The total value of the assets of the participants of the concentration at the time of submitting the declaration of concentration or in the last financial year preceding it exceeded four billion drams, or the value of the assets of at least one of the participants at the time of submitting the declaration of concentration or in the last financial year preceding it exceeded three billion drams, or
- The total amount of income of the participants of the concentration exceeded four billion drams in the last financial year preceding the moment of submission of the declaration of concentration, or the amount of income of at least one of the participants exceeded three billion drams in the last financial year preceding the moment of submission of the declaration of concentration, or
- The total amount of revenue of concentration participants who did not perform activities in the financial year preceding the year of submitting the concentration declaration or performed activities for less than 12 months, calculated for the 12 months preceding the time of submitting the concentration declaration, exceeded four billion drams, or the amount of income of at least one of the participants, calculated for the 12 months preceding the time of submitting the concentration declaration exceeded three billion drams.
In which case the merger/acquisition of companies will not be considered as concentration?
Reorganizations of economic entities, actions or transactions that take place between economic entities that are groups of legal entities and/or groups of individuals approved by the Commission’s decision are not considered concentration and are not subject to declaration. However, according to article 14 of the Law reorganizations, actions or transactions within a group of persons must be reported to the Commission within 10 days of the transaction.
According to Article 4 of the Law, a group of persons is a group of legal and/or natural persons, between which there is an actual connection or control, but one of the requirements established by law is met. Examples of such requirements include:
- the organization and a natural or legal person, if that natural or legal person has the right to directly or indirectly manage more than half of the authorized capital of the organization based on its participation in that organization and (or) contract, in accordance with the procedure established by law, or
- organizations, if the same natural or legal person, on the basis of the founding documents or contract of the organization or in another way, gets the opportunity to predetermine the decisions taken by these organizations (including the conditions for carrying out business activities) and (or) give instructions that must be carried out by these organizations,
- organizations in which more than half of the members of the collegial executive body are the same natural persons.