Posted on 5 Jul 2019
Cross-Border Mergers – our top tips
Following the extension of the Brexit deadline to 31 October 2019, the opportunity for UK companies to take part in an EU cross-border merger (CBM) under the UK Companies (Cross-Border Merger) Regulations 2007 (the Regulations) remains open for a few more months. The proposed Exit deal provided for a two year transition period. However if there is no deal then any form of transition period is perhaps unlikely.
In light of the revised deadline, we have gathered some of our top tips in order to manage a cross-border process quickly and efficiently.
For an overview of what a Cross-Border Merger is, please refer to our previous article.
1. Sweat the small stuff
Cross-border mergers involve at least one application to the competent authorities of the countries of each merging entity. Typically, it is only two. All of the EU Member states, except two, provide for a CBM system driven by notaries. Ireland and the UK are two exceptions. The High Court has adopted a strict and occasionally inconsistent interpretation of the requirements and deadlines imposed by the Regulations, particularly in the case of UK transferor companies. This has been shown to be the case even where the UK transferor has no UK business or employees and pays no tax here due to the fact that tax is paid, often at higher levels, in the EU country where the transferor operates its business. Given the relative ease of formation of a UK company, such transferors are less thin on the ground than might be expected. This was particularly so with German businesses. It was cheaper and quicker to incorporate in the UK. The situation worked fairly well until Brexit came along. The somewhat inconsistent approach of the UK courts is not totally surprising and is perhaps derived from the fact that the Regulations were a creature of German law and drafting, and the adoption by the UK involved relatively few changes to these laws, except to make the procedure more difficult.
It is therefore important that all bases are covered and all requirements set out in the Regulations are ticked off before making applications to the court. You are at the mercy of the clerk to the judge and the judge himself/herself.
To illustrate this point, in one case, the High Court refused to grant a pre-merger certificate where the company accounts on which the draft terms of merger were based were only three months old, despite the Regulations not specifying how recent the accounts must be. The High Court will also closely look at the relevant dates laid down in the Regulations, in particular ensuring that the notice of the proposed merger has been published in the Gazette in a particular form for at least one month before the date of the shareholder meeting to approve the merger. It is easy to get this wrong.
On a positive note, the High Court has sanctioned downstream cross-border mergers and these do not strictly appear in the Regulations. In our view, you will not have time where the CBM involves the merger of an EU parent company into its UK subsidiary. This article is too short to go into the difficulties that are involved here, but the consequence is that you will find yourself in court even more often. The other way round does not involve quite as many trips to the High Court, so you might have enough time.
2. Get your ducks in a row
In view of the above and the approach of the High Court, a UK merging company should ensure that it has reviewed its Companies House filings, statutory books and accounts for accuracy and consistency. Undertaking this exercise before applying to the High Court will help avoid any questions or request for clarifications (and therefore delay).
3. Instruct experienced Counsel
The CBM process is an unusual one and there are very few counsel who have the necessary experience. Choose the right counsel and issues such as court filings, the approaches of different judges in court hearings, which clerks to liaise with and opinions on the importance that the court will place on different issues can be dealt with much more satisfactorily. These few experienced counsel have been in court on a regular basis. Rely on their advice and book them early.
4. Be proactive
There are various bodies involved in a cross-border merger, including the High Court, Companies House, the Gazette, notaries in other EU jurisdictions (except Ireland) as well as other bodies in the relevant EU country. Some of these EU bodies operate at local levels rather than national. For example, Germany does not have one Companies House; it has several registries. Italy is much the same. The relevant regulations for the particular EU country seek to impose obligations on each of these bodies which involve deadlines and requirements to communicate with each other. You must liaise frequently with EU counsel and notaries to ensure that each of these bodies is aware of their responsibilities for completing each task to ensure the CBM remains on track. Do not be afraid to chase where certain actions are out of your hands and deadlines are approaching. Do not be surprised if there is some inconsistency between different notaries. Check the addresses of the particular local registry involved and do not assume that anything is like the UK. The High Court can pick up on these points and the result is frustration and more delay.
When you think you are there, it pays to ensure translation and notarisation is ready to go as soon as the pre-merger certificate is received.
The result of a successful CBM is set out in somewhat anodyne text in the Companies House register entry for the company concerned. In practice the relevant EU registry contacts Companies House direct and it is up to you to check what is going on. Companies House will not tell you that the CBM has gone through.
Don’t forget Regulation 19(3)! The UK transferor must provide a copy of the relevant EU court's order approving completion of the CBM to Companies House within 14 days of the order being made.
There is still time – just.
It will cost more than in every other EU jurisdiction (except Ireland). The requirement for a court procedure increases the costs and uncertainty. This wasn’t our choice.
If something can go wrong, it will. We can fix it though.
If you would like further information, please contact Philip Newhouse, Partner in our Corporate Team.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.