The Companies (Cross-Border Mergers) Regulations 2007 (the Regulations) came into force in December 2007 and implements Directive 2005/56/EC of the European Parliament and Council on cross-border mergers of limited liability companies. The Regulations provide for the merging of any two public or private limited liability companies resident in the EU (providing such a merger is permitted under the relevant domestic law of a company) and introduce the concept of a ‘true merger’ to the English legal system. Whereas previously in the UK mergers could only be effected by transferring the individual assets and liabilities of the transferor under a traditional business sale and purchase agreement mechanism, the Regulations now allow for the automatic transfer of all assets and liabilities of a transferor by operation of law. Although this is a relatively new process, and to date only a handful of the mergers have been affected, there are signs that an increasing number of companies are now opting to carry out reorganisations of their groups using the new cross-border merger process.
HOW DO CROSS-BORDER MERGERS WORK?
The Regulations set out three possible ways to carry out a cross-border merger:
- merger by acquisition, where an existing transferee company acquires all the assets and liabilities of one or more transferor companies;
- merger by absorption, between an existing transferee company and one or more of its wholly owned subsidiaries; and
- merger by formation of a new company, which acquires the assets and liabilities of two or more existing transferor companies.
In each case the transferor companies are dissolved, without having to go through a formal liquidation process. On dissolution, all their assets and liabilities automatically transfer to the transferee company by operation of law.
To implement a cross-border merger in the UK it is necessary to obtain the approval of the High Court. It is also necessary to carry out a parallel process in each of the other relevant jurisdictions involved to obtain a pre-merger certificate from the appropriate authority.
In the UK the required steps for a UK company involved in a cross-border are set out in the Regulations. Firstly the directors of a UK merging company must prepare or produce the following documents:
- draft terms of the merger (these are set out in a format similar to heads of terms and must contain certain prescribed information in relation to the transferee and the transferor companies);
- a directors’ report explaining the effect of the merger for members, creditors and employees, and setting out the legal and economic grounds for the merger; and
- an independent expert report as to whether the consideration for the transfer is reasonable (this will not be required if the merger is by absorption of a wholly owned subsidiary, or if all the shareholders of the merging companies agree that production of the report is not necessary).
The company must then make an initial application to the High Court to convene a meeting of the shareholders of the company so that the merger terms may be considered and approved by shareholders (except where the company is a transferor company on a merger by absorption of a wholly owned subsidiary, in which case no shareholder approval is required).
The draft terms of the merger must be approved by a majority in number, representing 75% in value, of each class of members of the UK merging company, present and voting in person or by proxy. It is noted that any creditor can apply to the court for it to convene a meeting of creditors. If a creditor meeting is summoned or a meeting of any class of creditors, the draft terms of merger must be approved by a majority in number representing 75% in value of the creditors or class of creditors, present and voting either in person or by proxy at the meeting. At least two months prior to the shareholders’ and or creditors’ meeting, particulars of the meeting, a copy of the draft terms of the merger, and the court order convening the meeting must be submitted to the companies registrar who will then publish notice of the meeting in the Law Society Gazette. At the same time, where employee participation arises (see below), the employee representatives must be sent a copy of the director’s report for commentary. If the employee representative delivers its opinion at least one month prior to the convening of the shareholders’, or creditors’, meeting, then this opinion shall be appended to all copies of the report circulated to shareholders and creditors.
Once the relevant approvals have been obtained the company makes a further application to the High Court for the issue of a pre-merger certificate confirming that the High Court is satisfied that the company has complied with the pre-merger formalities. Once the pre-merger certificate is granted an application is made to the competent authority in the jurisdiction of the transferee company to sanction the merger and set a date from which the merger will take effect. Under the UK regulations, the date that the court fixes cannot be less than 21 days after the court order approving the merger.
One of the key aspects of the cross-border merger regime is the protection of employee participation rights. Employee participation is the right of employees or their representatives to appoint or oppose the appointment of members to the board of directors. Certain EU countries, such as Germany, go further by upholding the principal of co-determination (this involves employee representatives sitting alongside directors on the board). In the context of a cross-border merger, where a merging company has over 500 employees and employee participation, or co-determination rights arise, the level of employee participation in the resulting company will be determined either by agreement between the merging companies and a special negotiating body or the merging companies may elect to adopt the standard rules. Under the standard rules the level of employee participation on the board of the merged company will be equal to the highest level of employee participation in any of the merging companies.
The impact of employee participation issues should be carefully considered as they can significantly increase the timescale and complexity of a cross-border merger. UK companies are unaccustomed to the concept of employee participation and should recognise that a cross-border merger may create employee participation rights.
There are many commercial and legal advantages for carrying out a cross-border merger under the Regulations. As a cross-border merger results in only one corporate legal entity this can be used to generate business efficiencies and streamline a corporate group. From a legal perspective, the advantages of using a cross-border merger are numerous. For a large group with complex assets and liabilities, the cross-border merger regime constitutes a more efficient way to merge the businesses of two companies rather than a traditional transfer of the individual assets and liabilities of other companies because the assets and liabilities of the transferor companies will transfer automatically by operation of law. As the transferor company is automatically dissolved on the merger taking effect there is no need to undergo a separate liquidation process following a merger, and therefore costs and timescales are reduced.
The Regulations involve a court process, which means that factors such as counsel’s fees and timing issues will need to be considered. As the procedure becomes more popular it will become a well-trodden path that should reduce time and cost scales.
The process is not suitable for those transferees that wish to ‘cherry-pick’ assets of a transferor. For instance, there may be certain onerous liabilities, such as pensions liabilities, which a purchaser may not wish to take on.
As mentioned above, UK companies are not familiar with the concept of employee participation rights and a cross-border merger could result in such rights being mandatorily granted to UK employees where none had previously existed.
Before the introduction of the Regulations, the UK had no process by which companies could effect a true merger. The Regulations present a new, streamlined process that may be of particular use to corporate groups seeking to consolidate their subsidiary structures. Since the Regulations came into force there have been fewer than twenty companies that have taken advantage of the new process. However, in the past year there has been a rising number of cross-border mergers sanctioned by the English courts and the trend looks likely to continue.