A draft European Union (EU) directive governing cross-border mergers would offer corporate clients more choice at a time of decreasing merger activity in the City - but also incorporates unwieldy employee participation proposals, lawyers said this week.

The draft directive, published by the European Commission last week, would enable EU companies to merge into new corporate entities without maintaining subsidiaries of the original companies. However, existing company law would continue so as to allow companies a choice of procedures.


Vanessa Knapp, a corporate partner with City firm Freshfields Bruckhaus Deringer and chairwoman of the Law Society’s company law committee, said the tax implications for the new-model merged company were yet to be understood.


She added that companies merging with others in countries such as Germany - where there are strong requirements for employee consultation - would have to abide by those standards under the current proposals, which might deter UK companies from using the model.


But she added: ‘Anything that gives companies another way of doing mergers is a good thing.’


William Underhill, a partner in the corporate department of City firm Slaughter and May, who sits on the joint Law Society and City of London Law Society working party on takeovers, said: ‘While there is not necessarily any pent-up demand for a new structure for mergers - and there is no evidence that there is currently a hole preventing mergers from taking place - on the other hand, more choice must be a good thing.’


The Department of Trade and Industry is encouraging businesses to comment on the draft directive. Minister Jacqui Smith said: ‘The proposal aims to help cross-border mergers take place more effectively within the single market. It offers increased legal certainty and seeks to avoid unnecessary burdens and constraints on business while ensuring adequate safeguards for those who deal with the companies involved. I want to hear from businesses so we can make sure the details deliver that.’


Meanwhile, financial data gatherers Mergermarket announced last week that expected merger activity in the UK is alarmingly low compared with expectations in 2003.


Mergermarket said the reason could be that following years of restructuring in the UK, there are few significant opportunities for deals in the short term.


One City corporate partner - who preferred not to be named - said: ‘I think it’s been a very patchy market this year. There was an upturn in October last year, and then again at the beginning of this year, but it’s very patchy again now, although there are signs that the market may be improving.’


According to Mergermarket, leisure is expected to be the most active sector for mergers and acquisitions in the UK, followed by industrials and business services. The leisure sector is seen as highly fragmented and well-developed, with a need for consolidation, particularly in the hotels and pubs industries, and there is growing interest in areas such as betting and football clubs.