Legal Effects of Merging Companies

The Commercial Companies Law No 18/2019 regulated the merger of companies in articles 33 to 39. The Law determined two ways for the merger. The first one is a merger by way of absorption through the dissolution of one or more companies and transfer of its or their assets and liabilities to an existing company. The second one is a product extension merger by way of consolidation through the dissolution of two or more companies and the establishment of a new company to which the assets and liabilities of each one of the merged companies shall be transferred. The Law also determined the merger procedures, information, and the documents required to be submitted to the Commercial Register Section at the Ministry of Commerce Industry and Investment Promotion. As a result of the merger, whether by way of absorption or consolidation, the legal personality of the merged or dissolved company shall expire and a new one shall be created. This results in several legal effects, the most important of which are:

  • Transfer of the debts of the merged company to the new company.

If the merger resolution is published according to the requirements of Article 37 of the Commercial Companies Law and the creditors do not object during the notice period, the merger resolution shall be deemed final and consequently, the merging company or the new company shall replace the merged companies in all their rights and liabilities from the date of registration of the companies’ details in the registry of the merging company in cases of merger by way of absorption, or from the date of registration of the new company with the Registrar in cases of merger by way of consolidation pursuant to Article 38 of the Commercial Companies Law. In other words, the merging company shall be considered a universal successor of the merged company and shall legally replace it in all its rights and liabilities arising from its previous contacts. This shall be in the application of the general rules of the extension of the effects of the contract to the universal successor as determined by Article 162 of the Civil Transactions Law which reads as follows:   

“The contract shall not incur any obligation to a third party but it may grant him a right thereof.”

  • Transfer of Employment Contracts

 The merger does not affect the employment contracts where such contracts shall continue by the force of law between the worker and the new employer. The effect of the contract shall extend to the new employer, who shall be responsible for the implementation of all obligations arising from it. Labour disputes related to equality between workers as to the financial grades and job titles usually arise from the merger. One of the main reasons for the emergence of these disputes is the belief of some people that the transfer of ownership of the establishment, by merging it with another establishment, entitles the workers in the merged establishment to claim the special rights that are decided for the workers of the merging establishment, such as the regulations for end-of-service benefits. While other people see the opposite of this, as long as the workers’ employment contracts concluded with the merged company did not provide for these rights. This is because the succession of the merging company to the merged company shall not entail that the merging company be obliged to bear the rights of the workers of the merged company that exceeded their rights contained in their work contracts before the merger. They believe that there is no room for applying the equality rule in such cases, as equality is only in the rights established by law. 

  • The merged company loses its capacity to litigate 

As soon as the merger is declared in the Commercial Register, the merged company shall have no capacity to litigate, and the powers of attorney issued to lawyers shall expire. Therefore, no litigation procedure may be taken against the company because its personality ceases to exist. In lawsuit No 283 for the Judicial Year 31, the Egyptian Court of Cassation ruled that the objection is inadmissible because the petitioner had filed it against the merged company after its merger and establishment of a new company.

  • The possibility of revoking the government licenses of the merged company

The licenses issued to the merged company shall not be transferred to the new company. Some legislation under which the merged company obtained such licenses may require prior approval from the competent authorities in the event of a merger; otherwise, such authorities may decide to revoke those licenses. For example, Article 33.2 of the Royal Decree No 20/2004, requires in the event of a merger that the natural or juristic person that becomes a duly authorized successor to the licensee, shall, as a condition to acquire the rights granted by the license, be required to submit such documents as the Telecommunications Regulatory Authority deems appropriate. Article 21 of the Mineral Resources Law No 19/2019 gives the Public Authority for Mining the right to cancel the license if the licensee fails to notify it of the merger.

S & A Law Firm