Mergers under the Companies (Cross- Border Mergers) Regulations 2007 Elizabeth Wall & Frank...

Mergers under the Companies (Cross-Border Mergers) Regulations 2007

Elizabeth Wall & Frank Lennox-Hennessy

Required to comply with the European Directive of 2005 on cross-border mergers of limited liability companies

Brought into force in UK on 15 December 2007 Now possible for public and private UK companies

to be involved in a true merger with an EEA cross-border element

A&O advised on one of the first mergers to be completed under the Regulations

All such mergers so far have been intra-group

The Companies (Cross-Border Mergers) Regulations 2007

What is a merger? Coming together of two or more entities to form a single entity with the

assets and liabilities of each absorbed entity transferred to the surviving entity by operation of law (universal succession)

Company A Company B

Company A Company Ball assets and

liabilities transferred by operation of law

Company B(including all assets

and liabilities of former Company A)

Company A

(dissolved)

Pre-Merger

Merger

Post-Merger

Universal succession mergers commonplace in most of continental Europe

How does a merger differ from an acquisition?

From a commercial standpoint many "mergers" have occurred under s.895 of the Companies Act 2006 (formerly s.425 CA 1985) but in reality such "mergers" were acquisitions of the entire issued share capital

Under acquisition structure subsequent steps required to place all assets and liabilities into one entity (i.e. post-completion hive-up of assets and liabilities)

Company A Company B Company B

Pre-Acquisition Post-Acquisition

Company A(still in existence and possessing all of its

assets and liabilities)

Across European borders The European Company: Societas Europaea (SE)

Within UK Long possible under s.900 CA 2006 for two UK companies to

merge (formerly s.427 CA 1985 and previously s.208 CA 1948) But in cases such as Nokes v Doncaster (1940) the courts

indicated that these statutory provisions could not transfer assets and liabilities where the transfer would otherwise require consent of a third party

So not possible to transfer non-assignable contracts with any certainty under domestic merger provisions

Sections rendered dormant but recent progressive approach to insurance and banking business transfers under Financial Services and Markets Act 2000 likely to be followed in relation to cross-border mergers

Were mergers involving UK companies previously possible?

Shareholders Shareholders

German Transferor

UK Transferee

Transferor Shareholders

(shares and possibly cash)

Transferee Shareholders

Assets & liabilities

German Transferordissolved

1. Merger by absorption

The three types of cross-border merger

Italian Transferor

UK Transferee

SharesAssets & liabilities

Italian Transferor dissolved

2. Merger by absorption of a wholly-owned subsidiary


Shareholders Shareholders

Dutch Transferor

UK Transferor

Assets & liabilitiesAssets & liabilities

Dutch Transferor

UK Transferor

UK Transferee

(Newco)

Dutch Transferor Shareholders

UK Transferor Shareholders

Dutch Transferor Shareholders


Dutch Transferor dissolved

UK Transferor dissolved

UK Transferee

(Newco)

UK Transferor Shareholders


3. Merger by formation of a new company


Overview of timetable and procedure

Two procedural stagesi. each transferor and the transferee obtain certificates

from the "competent authority" in their jurisdiction certifying that the pre-merger steps have been completed (the Pre-Merger Certificates)

ii. the transferee company applies to its competent authority for the sanction of the merger

In England and Wales the competent authority is the High Court

In certain other jurisdictions the competent authority is a notary

Case study: Intra-group merger of UK asset manager and German asset manager

FSA (English regulator)

UK parent company

BaFin (German regulator)

UK asset manager

German asset manager

FSA

UK asset manager

(passport pursuant to MiFID)

German branch of UK asset manager

UK parent company

Post-merger

Pre-merger

BaFin

Simplified timeline of events

Due diligence on contractsto be transferred

Issue: whether English, German and Austrian lawgoverned contracts can be

transferred pursuant to merger

01.07.08 08.08.08Draft terms of merger

submitted toCompanies House and notice published in London Gazette 12.08.08

Directors' report sent to all UK co.

employees by email

15.07.08Firm decisionto proceed

Key documents drafted:- draft terms of merger- directors’ report- independent expert’s report?

Draft terms of merger and directors' report translated

01.09.09Draft terms submitted

to German registrar anddirectors' report sent

to German co. employees


Issue: UK co. shareholder approval notnecessary but all timing

requirements in the Regulations are by reference to date of

shareholder meeting


Due diligence on contractsto be transferred

Issue: whether English, German and Austrian lawgoverned contracts can be

transferred pursuant to merger

08.08.08Draft terms of merger



employees by email

15.07.08Firm decisionto proceed









shareholder meeting





employees by email







13.10.08UK co.

shareholder meetingto approve

merger and waiverequirement for

independentexpert's report

Draft and submit first claimform and witness statement to

English Court and similar documents to German

commercial registrar



shareholder meeting





employees by email







13.10.08UK co.




14.10.08German co.

meeting and execution ofterms of merger(both in front ofGerman notary)






shareholder meeting





employees by email






13.10.08UK co.




14.10.08German co.







shareholder meeting

12.08.08Directors' report sent to all UK co.

employees by email




13.10.08UK co.




14.10.08German co.




24.10.08 First English Courthearing and receipt

of English pre-mergercertificate






shareholder meeting




13.10.08UK co.




14.10.08German co.


Issue: German commercialregistrar subject to no fixedtime period to issue German

pre-merger certificate





Draft and submit second claimform and witness statement






shareholder meeting

13.10.08UK co.




14.10.08German co.




24.11.08 German commercial registrarissues German pre-merger

certificate





05.12.08Second English

Court hearing andreceipt of order

declaring mergereffective





14.10.08German co.





certificate





23:59hrs31.12.08Merger

completed

05.12.08Second English

Court hearing andreceipt of order

declaring mergereffective








certificate





Examples of other mergers to date

Large British bank merged Polish company into an English company passported branch of English company to Poland allegedly motivated by intention to expand Polish

business without transferring substantial capital to Poland

UK bank

FSAUK Parent Company

Polish branch of UK bank

Polish regulator


Large American bank merged Italian subsidiary into English company passported branch of English company to Italy presumably driven by similar motivations as merger

described in case study

Examples of other mergers to date (cont'd)

UK bank(unlimited company)

FSA

US Parent Company

Italian branch of UK bank

Italian regulator


Large UK insurer effected a combined FSMA 2000 Part VII transfer and

merger to consolidate an Irish company in run-off into a UK company

aim to create a well capitalised insurance underwriting platform with a capital efficient structure

merger meant no liquidation of redundant Irish company required


Irish Company

Irish regulator

UK Parent Company

UK Company (including former Irish business)

UK Company

FSA

Pre-Merger Post-Merger

FSA

UK Parent Company


Belgian biotech group merged Irish wholly-owned subsidiary into Belgian

company business of Irish subsidiary continued as a branch reduced group's administrative costs by eliminating

requirements for Irish company to produce audited accounts and maintain board directors (€200,000 p.a.)

preservation of past losses for ongoing tax purposes

Large US industrial company merged German company into a Dutch company most tax efficient means of transferring German

company’s shareholdings in several significant subsidiaries to Dutch company as part of a wider tax driven restructuring

German notary agreed to waive certain statutory time periods upon receipt of waiver from German company’s two creditors


Other possible applications

Restructuring and insolvency gain access to the restructuring or insolvency laws of

a particular Member State choose Member State that provides for the flexibility

and legal means to do as the parties propose To simplify group structures

means of removing dormant or superfluous companies

potential savings in audit fees, management time and other costs

Potential issues: Creditors

Creditors’ position likely to be considered carefully at first hearing

Particular concern where transferee is not a UK company

Possible imposition of creditor protection mechanisms or appointment of a process agent

In intra-group mergers to date the court has been satisfied by production of transferor’s and transferee’s balance sheets

Security issues

Potential issues: Tax

European Mergers Tax Directive (the "Tax Directive") Provides for cross-border mergers to be tax neutral for

shareholders and the transferor company provided that the assets of the transferor remain within the charge to tax in its jurisdiction of residence

Otherwise may be possible to rely on a domestic exemption in the transferor's home state

Note that certain tax reliefs introduced by the Tax Directive are dependent on the merger not being effected for tax avoidance purposes

Potential issues: Employee participation rights

Rights protected where they exist in any of the merging companies

Possible rights: mandatory representation on board (Germany, Sweden) to recommend/oppose board appointments (Netherlands) none (UK)

Two options where rights exist: adopt standard rules on employee participation negotiate for up to 12 months with special negotiating body

No court approval until employee participation arrangements determined

Third party mergers under the Regulations

Regulations may be used in the future to effect mergers between third parties

Obvious advantage is that all assets and liabilities of merging companies are placed in one surviving company

Previously English law required two steps to "merge" two companies (e.g. scheme followed by hive-up) but now just one stage

Should have been possible under a scheme by virtue of s.900 CA 2006 but prevented by Nokes v Doncaster (1940)

Takeover Code and Prospectus Rules apply in usual way

Watch this space!

Questions?

These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.

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