The European Commission says it expects the law to reduce costs while guaranteeing the requisite legal certainty and enabling as many companies as possible to benefit.

Internal Market and Services Commissioner Charlie McCreevy said: "It will now be much easier for Europe's companies to cooperate and restructure themselves across borders. This will make Europe more competitive and enable businesses further to reap the benefits of the Single Market."

Currently, such mergers are either impossible or difficult and expensive. The new directive helps small and medium sized companies (SMEs) that want to operate in more than one Member State - but not throughout Europe - which means they cannot seek incorporation under the European Company Statute.

The text covers all limited liability companies except for undertakings for collective investment in transferable securities (i.e. UCITS, or mutual funds). The agreement also allows Member States to exclude some types of co-operatives from taking part in cross-border mergers under the Directive. In general, mergers will be governed in each Member State by the rules applicable to 'domestic' mergers.

Two factors may militate against widespread adoption of the new rules: employee participation and tax.

As regards employee participation, in a merger under the Directive the newly created company will be subject to negotiations based on the model of the European Company Statute (ECS). Under that model, a special negotiating body must be established to agree participation arrangements. If that fails, standard rules on employee involvement apply. These stipulate that the higher standard of workers participation existing among the merging companies will apply to the merged entity if at least one third of the total number of employees before the merger are covered by a workers' participation scheme. It's just this that has scared off many potential users of the ECS.

As with the ECS, the new Directive allows home states to determine much of the tax treatment of merged companies: they might be merged in a legal sense, but not fiscally.

Theoretically, the Mergers Directive (a separate, already existing piece of legislation) deals with the tax treatment applicable to mergers, divisions, transfers of assets, and exchanges of shares among companies in different member states. The directive aims to introduce a common EU tax system regarding cross-border transactions and to provide the same tax relief as would usually be available for similar transactions within a single member state.

The Mergers Directive attempts to eliminate the tax on any capital gains arising from a reorganization; it allows the carrying forward of tax-exempt reserves and losses; and it eliminates adverse consequences of a merger for shareholders.

In practice, however, the behaviour of national tax authorities, as might be expected, has lagged behind the principles of the Mergers Directive. High costs, together with legal and fiscal uncertainty, are therefore unfortunately likely to continue to dog the EU's well-intentioned efforts to create a smooth, Europe-wide playing field for business.