Cross-border mergers: the Regulations and the impact of Brexit
The Companies (Cross-Border Mergers) Regulations 2007 (the “Regulations”) established a framework for cross-border mergers between companies incorporated and registered in England and Wales and companies governed by the law of other EEA States.
Based on the number of adverts in the Gazette, there has been a notable increase in the number of cross-border mergers involving UK companies in 2016 and 2017 and this trend is continuing. In particular, it has been reported that:
- the number of cross-border mergers carried out in 2017 was at its highest since the Regulations were first introduced, showing a 45% increase when compared with 2015;
- almost 59% of the cross-border mergers announced in the Gazette in the first 10 months of 2017, involved the UK company as the Transferor Company.
Although it is not possible to identify the rationale for a cross-border merger from information that is publically available, given the timing for this significant increase in demand, Brexit and the triggering of Article 50 of the Treaty on European Union are likely to have played a key role.
What do the Regulations permit?
The Regulations apply to mergers which involve a corporate restructuring, such that the assets and liabilities of one EEA-state company (the “Transferor Company”) are absorbed by another EEA-state company (the “Transferee Company”).
The Regulations refer to three different types of cross-border merger:
- Merger by absorption (where an existing Transferee Company absorbs one or more merging Transferor Company);
- Merger by absorption of a wholly-owned subsidiary; or
- Merger by formation of a new company (where two or more Transferor Companies merge to form a new Transferee Company).
The Regulations set out the pre-merger actions that each Transferor Company and/or Transferee Company must undertake before the merger can be implemented. This includes (i) preparing and adopting the prescribed particulars (or the terms of merger) and (ii) a directors’ report detailing the effect of the merger for the company’s shareholders, creditors and employees, and the legal and economic grounds for the proposed merger. The terms of merger are then approved at a Court-convened shareholder meeting.
The UK company is required to obtain a certificate from the Companies Court that it has properly completed these pre-merger actions and the other EEA-company involved with the merger will also have to comply with a similar procedure, as set out in its national law that implements the Regulations.
The effect of the court approval is to make the merger binding on all stakeholders including creditors and employees. Depending on circumstances their interests may need to be separately represented in the process.
What are the consequences of a cross-border merger under the Regulations?
The consequences of the merger are:
- The assets and liabilities of the Transferor Company (including the rights and obligations arising from any employment contracts, if any) are transferred to the Transferee Company; and
- The Transferor Company is formally dissolved.
Because the transfer of assets and liabilities occurs by operation of law, no formal assignments or third party consents are necessary. Equally no formal liquidation process is required. Accordingly the trade-off for the court process is the simplification of the transfer and liquidation process.
What is the timeline for a cross-border merger under the Regulations?
A cross-border merger can typically take between 3 and 6 months to complete. This is largely driven by the timetable required by the court process in both jurisdictions, but the complexity of the merger terms including the availability of recent accounts and the materiality of post balance sheet events will also be factors.
What is the rationale for carrying out a cross-border merger now?
Although the Regulations have been used in the context of M&A transactions, cross-border mergers are primarily used in group re-organisations or restructurings.
Brexit has also been a driver for this form of reorganisation and for UK companies planning a cross-border merger, timing may become more important as the date on which the UK leaves the EU, gets nearer. It is not yet clear what status the UK will have during the proposed “transitional” period and given this uncertainty, it is expected that there will be a further increase in the number of cross-border mergers being implemented during the course of 2018, in preparation for the possible implications of Brexit.
If the UK retains its status as a Member State during the proposed “transitional” period, it is expected that UK companies would still be able to merge with other EEA-companies pursuant to the Regulations, provided that the local laws of the relevant EEA-country allows cross-border mergers with a non-EEA country.
However, the risk is that, where mergers have commenced but have not yet completed pre-Brexit, the pre-merger certificate issued by the UK Court, may not be recognised in the corresponding EEA-member Court.
Anyone considering a cross-border merger with a UK company, should therefore seek to be as certain as possible that the merger will have completed fully before Brexit, in order to minimise this risk.
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