Merger and information to employees

In the case of mergers of wholly-owned companies that have no employees, it is not necessary to prepare a directors’ report, not even regarding the employees.

In its resolution of December 16, 2024, the General Directorate of Legal Certainty and Public Faith (DGSJFP) analyzes a case in which a parent company absorbs its subsidiary, of which it owns 100% of the share capital. Given that the merger was unanimously approved at universal general meetings, with the sole shareholder of the subsidiary acting as the board, articles 9 and 53 of the Structural Modifications Act (LME) are applicable. In this context, the absorbing company has employees, while the absorbed company does not.

Although the public deed states that the operation has no impact on the employment of the absorbing company, the Commercial Registrar refuses to register it on the grounds that, in accordance with art. 9.2 LME, the directors must also prove that the report provided for in art. 5 LME has been prepared and made available to the employees.

The DGSJFP revokes the qualification note and concludes that, in this specific case, the directors’ report for the employees is not necessary. Its interpretation is based on the fact that art. 53 LME, when regulating internal mergers, takes precedence over the general rule of art. 9. According to a literal and systematic interpretation of the LME, when the legislator wanted to exclude information for employees from the exemption of reports, it has been expressly established in art. 9.2 LME.

In its First Book, Royal Decree-Law 5/2023 regulates the structural modifications of companies, including mergers and divisions/segregations, both internal and cross-border, through the LME. These operations must follow a procedure that guarantees the protection of the interests of partners, creditors and employees. In this sense, the LME requires directors to draw up a merger plan (art. 4 LME) detailing the probable consequences of the operation for employment. In addition, according to art. 5 LME, they must draw up an explanatory report addressed to the partners and employees’ representatives, including the possible repercussions on labor relations and employment conditions. This report must be published, together with the merger project, on the company’s website or filed with the Commercial Register at least one month prior to the general meetings that will approve the merger (art. 7 LME).

However, the LME provides for the simplification of this procedure in certain special mergers. In the case of the absorption of a wholly-owned company, art. 53 allows for the directors’ report on the merger project to be dispensed with. This simplification also extends to the absorption of companies in which a 90% or greater stake is held (articles 54 and 55), to cases assimilated to the absorption of wholly owned companies (article 56) and, in some cases, to divisions/segregations with the creation of new companies or in favor of wholly owned companies (article 71).

In its resolution, the DGSJFP concludes that the absorption of a wholly-owned subsidiary is a mere corporate reorganization with no substantial impact on the power structure or on the shareholding composition, since the absorbing company already owned all the capital of the absorbed company.

Finally, the DGSJFP emphasizes that this commercial simplification in internal mergers within a group does not affect the rights of information and consultation of employees, protected by the First Additional Provision of the LME and, where appropriate, by the provisions on business succession of art. 44 of the Workers’ Statute.