PRESENTATION FOR
EU Directive on Cross-Border Mergers of Limited Liability Companies
The Process and Benefits for UK Companies Explained
AGENDA
What is the Directive?AimEffect Scope (eligibility)
Why utilise the Directive?How to utilise the Directive Pre Merger RequirementsAuthority ApprovalSummary
WHAT IS THE DIRECTIVE?
Companies are now able to avail themselves of a mechanism for the automatic transfer of all assets and liabilities of the transferor by operation of law and the automatic dissolution of the transferor company without having to go into liquidation.
As a consequence, there is no requirement to appoint a liquidator or commence a member’s voluntary liquidation, which saves on both costs and time.
INTRODUCTION
The Companies (Cross-Border Mergers) Regulations 2007 implement the EU Directive on Cross-Border Mergers of Limited Liability Companies (Directive 2005/56/EEC).
Together they enable civil-style mergers between limited liability companies in different EU states to facilitate the legislative and administrative difficulties in transferring businesses within the EU.
WHAT IS THE DIRECTIVE?
AIM OF THE REGULATIONS
Providing an alternative option to UK companies seeking to transfer assets through the usual methods of business or share acquisitions under the Companies Act 2006 and the Financial Services and Markets Act 2000.
Unlike these methods, a relatively simple merger process involving various procedural steps to be completed.
Rather than a traditional sale and purchase agreement mechanism, this is a true statutory merger where the transferring entity will be dissolved without going into liquidation.
These Regulations are an effective instrument for multinationals with presence in European Member States to consolidate, integrate and rationalise European business activities in one legal entity.
EFFECT OF THE REGULATIONS
There must be at least one company formed and registered in the UK and another in an EEA state in order to fall within the scope of the Regulations.
There are three types of merger provided for:
1. Merger by absorption
2. Merger by absorption of a wholly owned subsidiary
3. Merger by formation
SCOPE OF THE REGULATIONS
(WHO IS ELIGIBLE)
One or more existing transferor companies are dissolved without going into liquidation.
Once all the assets and liabilities are transferred to another existing company (‘transferee’), the transferor is dissolved without going into liquidation.
Consideration is required. - Reg. 2(2).
MERGER BY ABSORBTION
Whereby the transferor company is a wholly owned subsidiary of the transferee and dissolved without going into liquidation.
On being dissolved and without going into liquidation, the transferor transfers all assets and liabilities to the transferee.
Because there is only a single shareholder in the transferor, a number of exemptions apply, compared to the default procedure.
- Reg. 2(3).
MERGER BY ABSORPTION OF WOS
Whereby two or more transferor companies transfer all assets and liabilities to a transferee company that is newly and specially formed for the purposes of the merger.
The formation of this new transferee company and merger will be in exchange for the issue of securities or shares in the acquiring company, to the members of the transferor company.
- Reg. 2(4).
MERGER BY FORMATION
The cross-border merger may result in additional synergies and more critical mass.
A single corporate entity will help generate business efficiencies such as facilitating the standardisation of common company policies, employment policies and business principles, thereby lessening the frequency of required board and shareholders meetings.
A merger of this type will reduce the administration and overhead expenses, harmonising the decision and management structure within Europe.
WHY UTILISE THE DIRECTIVE?
ADVANTAGES
The transferee company will acquire all assets and liabilities by way of absorption. These will be acquired from the transferor company that will cease to exist without a liquidation procedure. Unlike alternative merger options consisting of transferring assets individually, the Regulations provide companies comprising more complex assets and liabilities, with a cleaner way to achieve cross-border merger operations. This circumvents the need to redraw contacts individually in order to perfect the transfer or to deal with trapped assets in the transferring entity that must go into liquidation. This is a more efficient and clear-cut way of transferring assets.
LEGAL BENEFITS
The company ceasing to exist will generally be deemed to realise a capital gain upon the moment of the merger, when the market value of the assets and liabilities exceed their fiscal book value.
Such gain may be subject to corporate income tax provided
none of them are exempt under the applicable participation exemption regime; and
no loss compensation is possible in the country where in which the transferor company resides.
In 2007, the UK introduced a new tax regime applying to such mergers to make them tax neutral.
TAX BENEFITS
The merger must be sanctioned by the court. In order to obtain this approval, the companies must fulfil the pre-merger acts and formalities necessary; Depending on the question whether it’s a merger into or out of the jusrisdiction these are provided for in Reg 6 or 16.
Each company will apply to their relevant national competent authority for an order certifying the company has completed the pre-merger requirements; “Pre-merger Certificate”.
This is the High Court for England and Wales.
The transferee company’s jurisdiction will sanction the merger when the pre-merger certificates have been provided.
HOW TO UTILISE THE DIRECTIVE?
The company must produce two main legal document, Draft Terms of Merger’ and the
key terms of the merger;
data of the merger for accounting purposes.
Directors Report
explains the legal and economic effects of the merger on members, creditors and employees of the company.
Unless all shareholders agree otherwise, the company must produce an independent expert’s report as to whether the consideration for the transfer is reasonable.
PRE-MERGER REQUIREMENTS
DOCUMENTATION TO PRESENT THE UK COURT WITH
All documentation must be filed with Companies House.
Companies may either publish their draft terms on their website or attach a hard copy of the draft terms with the completed form.
However, the Companies (Reporting Requirements in Mergers and Divisions) Regulations 2011 amended the 2007 Regulations and did introduce a new facility allowing companies to publish draft terms of a merger on a website;
Terms are to be enclosed along with a copy of any court order summoning a meeting of the company members or creditors.
These documents must be delivered at least 2 months before the first meeting of the members for publication in the London Gazette which Companies House will do once they receive the CB01 form.
There is no fee for filing in a cross-border merger. Companies House will make the documents available to the public on the Companies Register.
PRE-MERGER REQUIREMENTS
COMPANIES HOUSE
In order to publish draft terms of a company merger on their website, certain conditions must be met:
The website must be maintained by or on behalf of the company, which must be identified;
There can be no fee payable to access the draft terms on the website;
The terms remain available throughout the period beginning 1 month before and ending on the date of the first meeting of the members.
PRE-MERGER REQUIREMENTS
CONDITIONS TO PUBLISH ONLINE
The merger must be approved by the shareholders of the relevant companies, which will require 75% majority for approval.
In the UK, the creditor can apply to the court to summon a meeting of creditors as in some cases their approval may be necessary.
PRE-MERGER REQUIREMENTS
SHAREHOLDER APPROVAL
PROCESS AT A UK COURT
MERGING BOTH INTO AND OUT OF THE UK
The Company’s Certificate of Incorporation Their Annual return from Companies House The Company Register of Members A certified translated excerpt of the other involved EEA
state’s Company Register Draft Terms of Merger A certified translation or English, Power of Attorney
document
A Director’s Report
A copy of the submitted CB01 form and receipt from Companies House
An extract from the Gazette as placed by Companies House
A Share Certificate demonstrating where the shares are
Company Accounts going back 1 year
The application to court for a pre-merger requires the submission of a witness statement referring to and accompanied by a list of documents:
! It is important to note that if any of the above documentation is in a language other than English, it must be accompanied by a certified translation in English.
Subject to size, the company must include the consequences for their employees rights in their documentation
When the merging company has over 500 employees and employee participation rights in place already, the level of participation in the resulting company is to be determined by either agreement facilitated by a Special Negotiating Body (SNB) or they may elect to adopt the standard rules.
These will mean that the level of employee participation is to be equal to the highest level of whichever merging company.
If there are no employees or fewer than 500, the company’s employees rights that will result from the merger may still need to be indicated.
EMPLOYEE PARTICIPATION RIGHTS
COMPETENT AUTHORITY APPROVAL
FOR MERGERS BOTH INTO AND OUT OF THE UK
Once the courts of each jurisdiction are satisfied that these pre-merger formalities under the Directive and local implementation have been complied with, they will confirm this by issuing a pre-merger certificate.
This will be the High Court for England and Wales.
Merging companies will have up to 6 months to resolved any outstanding issues (concerning employees, for instance) before making a joint application to the relevant authority in the transferee’s jurisdiction.
Once the companies have obtained their pre-merger certificates from their own jurisdictions, they must apply to the competent authority in the jurisdiction of the transferee entity that will sanction the merger.
Merger into the UK: the High Court will take this decision. Merger out of the UK: the other EEA state’s court will take this decision.
Once an order sanctioning the merger is issued, the UK company must:
send a copy of the court order no more than 7 days after the date on which it was made, to Companies House
as well as details of any merging company outside the UK, including the register in which the company is entered and their registration number.
The UK Court will also automatically send notification to the foreign Registrar informing them of the approval for the merger.
Companies House will then:
send notification to the register of each transferor company from other EEA states to dissolve the other EEA state company off their foreign register for companies merging into the UK.
COMPETENT AUTHORITY APPROVAL
FOR MERGING INTO THE UK
If the transferee company is in another EEA state, the UK company must deliver a copy of the order from the relevant competent authority in said state that approved the completion of the merger, to Companies House.
This must be performed no more than 14 days after the date on which it was made.
If it is in a foreign language, it must be accompanied by a certified translation.
The foreign Court will also automatically send notification to the UK Registrar at Companies House informing them of the approval for the merger.
The company will then be dissolved by Companies House with an explanatory note.
COMPETENT AUTHORITY APPROVAL
FOR MERGING OUT OF THE UK
SUMMARY
Although utilising the Directive may appear to be an exotic and more costly method of transferring
assets, it is becoming more and more a familiar and regular feature of doing cross-border merger deals.
In a shrinking world, the Regulations are set to play a key role in the creation of a truly pan-European
corporate landscape.
Philipp Simon
Ely Place Chambers30 Ely Place
London, EnglandEC1N 6TD
Website: elyplace.com E-Mail: [email protected]
Tel.: +44 (0)20 7400 9600Fax: +44 (0)20 7400 9630
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