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Do acquired companies survive in merger transactions? Sometimes it happens*

ABSTRACT – According to a recent judgment of the Italian Corte di Cassazione[1], although – as a general rule – in merger by acquisition transactions the acquired company loses its legal standing, such a company can still be sued whenever this is needed to protect a counterparty that, without any fault, is unaware of the merger.

The acquired company according to Italian Corte di Cassazione case-law

Under the Italian law, the consolidation or merger of several companies can be effected by the establishment of a new company, or by absorbing one or more others into a company.  Article 2504-bis of the Italian Civil Code provides that the company resulting from the merger, or the absorbing company, assumes the rights and obligations of the extinguished companies. The company resulting from the merger, or the absorbing company, continues all of the existing relationships of the extinguished company(ies) prior to the merger, including those deriving from litigation.

According to traditional case-law,[2] mergers imply the extinction of the merged or absorbed companies and the consequent universal succession of company resulting from the merger, or of absorbing company,  in all the existing legal and procedural positions of the acquired company.

However, this traditional case-law has been superseded by the so-called ‘modification’ thesis, according to which a merger or a consolidation is a mere amending event affecting the act of incorporation of a company.

The aforementioned thesis is supported by the following points: (a) the Company Law Reform[3] amended art 2504-bis, Italian Civil Code, replacing the words ‘extinguished company’  with ‘the companies involved in the merger operation’; (b) the words ‘continuing in all their relationships prior to the operation’.  This would suggest that the company resulting from the merger, or the absorbing company succeeds the extinguished company(ies) in all their pre-existing relationships, but they do not necessarily imply the extinguished company ceases to exist completely.

Therefore, merger transactions imply mutual integration between companies, where individual relationships are integrated into a unified asset but maintain their link with the original source. In other words, merger operations can be qualified as merely formal subjective variations that do not extinguish a legal entity and, correlatively, do not create a new one.

As a result, a company that, in the course of a trial, is merged, or absorbed, into another should maintain its standing, in order to avoid, according to the principle of due process, any interruption of the pending proceedings involving the acquired company.

The cancellation of the acquired company from the Company Register

With judgment no 23641/2019, the Italian Corte di Cassazione addressed the procedural aspects of a case in which the extinguished company had also been deleted from the Company Register.

The Italian Corte di Cassazione stated that, after an extinguished company’s cancellation from the Company Register, there is a clear distinction between (a) its capacity to act as a claimant and sue a defendant in court and (b) its standing to be sued in court as a defendant.

According to the Italian Corte di Cassazione, when a company absorbed into another has been deleted from the Companies Register, it has no standing to sue, although it may maintain standing to be sued in court.

The continuation of the legal relationships in the company resulting from the merger, or in the absorbing company (as provided in art 2504-bis, Italian Civil Code) does not authorise the extinguished company(ies) assert it maintains its standing to sue defendants in court after cancellation from the Companies Register. However, it may justify any claimant acting in good faith bringing claims against the extinguished company(ies) even after its cancellation from the Companies Register.

The need to protect the counterparty (who cannot be burdened with the obligation to continuously monitor the Companies Register) may justify a plaintiff suing the extinguished company(ies) instead of the company resulting from the merger, or the absorbing company. In order to apply this principle, however, it is necessary that the claimant suing the extinguished company in court after it has been deleted from the Companies’ Register acts in good faith and genuinely has no knowledge of the merger/consolidation. ‘Knowledge’ is assessed according to the criteria of ‘normal diligence’ and is not assumed merely from the registration of the transaction in the Companies Register.

As a general rule, in the Italian legal system the Companies Register performs the important function of providing publicity to third parties of events regarding the company.

According to art 2193 of the Italian Civil Code, ignorance of facts which the law requires to be inscribed in the Companies Register cannot be pleaded by third parties from the moment in which the entry has been made.

As a result, the statement of the Corte di Cassazione shall be considered as an exception to the aforementioned rule of presumption of knowledge, which, according to the Corte di Cassazione,[4] in general does not apply in procedural law.

Conclusions

Mergers and consolidations achieve unification through the mutual integration of the companies involved in the transaction.

However, this shall not justify the extinguished company(ies), deleted from the Register of Companies, to maintain its standing to sue a defendant in court.

Such company(ies) can, however, be sued instead of the company resulting from the merger, or the absorbing company, when this is necessary to protect the counterparty that, in good faith is unaware of the merger/consolidation. Provided that, such ‘good-faith’ of the plaintiff shall be interpreted restrictively and assessed on a case-by-case basis.


[1]Corte di Cassazione, judgment no 23641/2019

[2]Corte di Cassazione, judgment no 50/2004, 5973/2005 and 1413/2006.

[3]Legislative Decree no 5 and no 6, 17 January 2003.

[4]See also Corte di Cassazione, judgment no 15234/2007.

This article was first published in the International Bar Association (IBA) Litigation Committee newsletter in May 2020


Photo: Anthony Painting 3 , 2007, Wikimedia Commons