Issues To Consider When Structuring A Cross-Border Merger Under The Cross-Border Merger Regulations

  1. Overview

    A stream of UK companies are merging with other EEA companies by way of cross-border merger. It is unclear whether this is being driven by Brexit. In the meantime, a trickle of cross-border mergers into UK companies continues to be implemented. In addition, the recent determination by the Court of Appeal that a merger involving a dormant Dutch company was not an abuse of process should encourage more groups to consider cross-border mergers. The Court of Appeal decision may also allow UK groups to engineer a cross-border merger by setting up an EEA company in advance of any proposed merger. This will often be more attractive than other alternatives such as the liquidation route under section 110 Insolvency Act 1986.

  2. Merger by absorption

    The UK implemented the Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC) (the 'Directive') by enacting the Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974) (the 'Regulations').

    The Regulations allow three different types of cross-border mergers:

    (a) a merger by absorption (an existing company absorbs one or more other merging companies); (b) a merger by absorption of a wholly-owned subsidiary (an upstream merger); or (c ) a merger by formation of a new company (two or more transferor companies, at least two of which are governed by the laws of a different EEA state, merge to form a new company).

  3. Reverse cross-border mergers

    Reverse cross-border mergers where a parent company merges into its subsidiary are becoming increasingly common and are effected by way of a merger by absorption. A merger by absorption pursuant to the Regulations occurs when:

    (a) there are one or more transferor companies, an existing transferee company and at least one of these companies is a UK company and one is an EEA company; (b) every transferor company is dissolved without going into liquidation and on dissolution transfers all its assets and liabilities to the transferee company; and (c ) the consideration for the transfer is shares or other securities representing the capital of the transferee company and, if so agreed, a cash payment recoverable by the members of the transferor company.

    A number of company law issues need to be addressed where the transferee company is a UK subsidiary such as how to deal with the parent company's share in its subsidiary.

    A recent example of a transfer by a UK company into an EEA subsidiary was the Fomenta Ltd merger where Fomenta Ltd was absorbed into its Italian subsidiary, Immobiliare.

  4. The procedure

    The process for implementing a merger is as follows:

    (a) each company circulates a merger proposal, management report and, if required, an independent expert's report to its shareholders. Whilst the UK rules may allow an independent expert's report to be dispensed with and to not require any other reports to be produced in connection with a cross-border merger, other jurisdictions may still require an expert to provide an opinion that shares being issued pursuant to the merger are not being issued at a discount (in accordance with the requirements of the relevant jurisdiction's 'Companies Act'). Whilst the directors of an English company need to ascertain that shares issued by a UK transferee company pursuant to a merger are not being issued at a discount to their nominal value, there is no requirement for an English private company to obtain an independent expert's report to that effect; (b) the shareholders of the UK merging company approve the merger (unless the requirement for a shareholder meeting is waived), and the creditors approve the merger where a creditors' meeting is ordered by the Court; (c ) the competent authorities in the merging companies' jurisdiction (the High Court in England and often a notary in other EEA jurisdictions) certify completion of the pre-merger requirements. If there is no need for the UK merging company to have a shareholders' meeting (a 'general meeting') and no merging company has any employees, it may be possible to seek certification in the UK within one to two months from the date of publication of the draft terms of merger and form CB01 (the 'Delivery Date'). If any merging company has employees, the pre-merger certificate cannot be obtained until more than two months after the Delivery Date. The Regulations set out the timetable for a merger by reference to the date of the general meeting to approve the merger. Where a general meeting is not required or where the requirement to hold it has been waived the High Court has indicated that the timetable set out in the Regulations should be read to require the Court to be satisfied that "at least two months before th e hearing at which the pre-merger certificate is to be sought the relevant documents have been with the Registrar of Companies and advertised by him, and that for at least one month employees and creditors have had the opportunity to consider those documents". (d) the merger is approved by the competent authority of the country where the merged entity will be registered. In England, this will be the High Court. Application for final approval must be made within six months of obtaining pre-merger approval. If it is granted, the court will fix a date on which the consequences of the cross-border merger are to take effect. This date must be not less than 21 days after the order is made (but can be at any earlier date selected by the merging companies which will often be a financial year end); and (e) the merging company is required to register the merger documents with the Registrar of Companies who must, where relevant, strike off the UK transferor company and notify the registrar in the jurisdictions where the other merging EEA companies are registered.

  5. Timing

    For a company either with no employees or with employees who have no right to participate in management, the full process of a cross-border merger is likely to take around four to six months. If the employees of the merging companies have a right to participate in management, a merger will take longer, as employee participation rights may take up to 12 months to agree.

  6. Employee participation

    The Regulations state that cross-border merger operations must take into account employee participation rights, where they exist. They do not impose any new participation requirements, but seek to ensure that when these are already in place prior to the merger, they are retained by the merged entity. Consequently, the competent authority may only give final approval for a merger once such arrangements have been agreed in accordance with the Regulations.

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