What is a Cross-Border Merger?
In recent months, a number of UK-based companies have sought to merge with EU companies. This may be due to perceived cost efficiencies, the opportunity to enter a new national market, or because of Brexit concerns. Here, we will consider how an EU cross-border merger may be carried out, and the key considerations for a UK-based target company.
An EU cross-border merger is the coming together ("merger") of two or more companies (or partnerships) which are incorporated in at least two EU member states. EU cross-border mergers are regulated by the 2005 European Directive on Cross-Border Mergers of Limited Liability Companies, which is transposed by EU member states into national law. In the UK, this is achieved through the Companies (Cross-Border Merger) Regulations 2007 (the Regulations). Interestingly, the Regulations apply to limited liability partnerships as well.
What are the three types of EU Cross-Border Merger?
The three types of cross-border merger which may be pursued by the parties:
- Merger by Absorption - whereby the target company is "absorbed" by transferring all of its assets and liabilities to the transferee company. The target is then dissolved without going into liquidation;
- Merger by Absorption of a Wholly-Owned Subsidiary - where the target is a wholly-owned subsidiary of the transferee, the target is dissolved and upon dissolution the target's assets and liabilities transfer upwards to the transferee. There are fewer formal requirements to be completed in this type of merger;
- Merger by Formation of a New Company - whereby two or more companies (the transferors) each transfer all of their assets and liabilities to a newly-formed 3rd company (the transferee). Once the transfer is complete, the two transferor companies are dissolved without going into liquidation.
How does an EU Cross-Border Merger Work?
Regardless of the type of merger sought, the processes required to complete the merger stay largely the same. The key steps which will be required are:
- Pre-Merger Acts: Before seeking court approval, you must complete the 'pre-merger acts'. This will include preparing a Merger Plan, a Directors' Report and possibly an Independent Expert's Report (detailed further below). You are also likely to require approval of the proposals by meetings of shareholders and creditors.
- Court Approval: The merger must then be approved by the competent authority of the country where the merged entity is to be registered. In England and Wales, the competent authority is the companies division of the High Court.
- Registration and Strike-Off: Following approval, Companies House must receive and register merger documentation. Finally, Companies House will strike-off the target/transferor company from the register and will notify the registrar of the country where the merged entity is to be registered.
How long will an EU-Cross Border Merger take?
The duration of the merger process will depend on various factors; including whether or not the employees of the company have the right to participate in the decision-making. If the employees do not have this right, the process can take approximately six months to complete. However, if the employees are entitled to this right under the Regulation, the process may take longer.
In the UK there is no automatic right to employee participation at board level; these arrangements may be introduced voluntarily by UK companies. Where the target company has an existing system of employee participation, this must be retained by the target company after the merger. The mandatory employee participation provisions contained in the Regulations will also apply to UK transferee companies with over 500 employees or an existing system of employee participation.
Will the Takeover Code apply?
The UK Takeover Code will apply to cross-border mergers in certain circumstances, depending on the type of cross-border merger proposed by the companies:
- The Code will only apply to a merger by absorption if the target company is a company which is subject to the Takeover Code (a Code Company);
- The Code will apply to an absorption of a wholly-owned subsidiary where the wholly-owned subsidiary is a Code Company and has more than one shareholder;
- In a merger by formation of a new company, the Code will apply if one or more of the transferors is a Code Company, unless the parties to the merger can satisfy the Takeover Panel Executive that a non-Code Company is being acquired.
What is a 'Merger Plan'?
A Merger Plan (sometimes known as the 'Draft Terms of Merger') is the document which details the merger proposed by the parties. It will contain details of the companies involved and any assets or liabilities, the actual terms of the merger and the likely effects of the merger (particularly in relation to employees). It is somewhat formalistic in its structure.
What is a 'Directors' Report'?
The directors must provide a report to the company's employee representatives (or the employees themselves, if there are no representatives) regarding the proposed merger. This must explain, amongst other items, the anticipated impact of the merger for members, creditors and employees and details of any directors' interests in the proposed merger.
What is an 'Independent Experts' Report'?
An Independent Expert's Report will be required unless the merger is by absorption of a wholly-owned subsidiary. The report will usually be prepared by an independent expert. This is an independent person who is eligible for appointment as a statutory auditor for the UK company. The report must address a certain number of issues, including particulars of the share exchange ratio and how it was determined.
How do I get approval for an EU Cross-Border Merger?
As part of your pre-merger acts, you will need to obtain consent from the shareholders of the company unless the merger is by absorption of a wholly-owned subsidiary. The Merger Plan must be approved by a majority in number, representing 75% in value, of each class of shareholders of the company. Similarly, if creditor approval is required, the Merger Plan must be approved by a majority in number representing 75% in value of the creditors or class of creditors.
Once you have completed your pre-merger acts, you can apply to the High Court for a 'pre-merger certificate', confirming that the acts have been completed. Within six months, you will need to seek approval for completion of the merger from the relevant authority of the country where the merged entity will be registered. All merging companies must be party to this court application. If this application is successful, a completion date will be allocated by the relevant authority. The completion date will be within the next 21 days from the date of the application.
What happens on completion of the merger?
On completion, assets and liabilities of the transferor company are transferred to the transferee company. The transferor company is then dissolved without needing to go into liquidation and will be struck-off the register of companies. In the case of a UK-based transferor, Companies House will note that, as from the completion date, the assets and liabilities of the transferor company were transferred to the transferee company.
What are the tax implications?
Tax treatment of the transaction will depend on the residence of the shareholder(s), rather than the companies that are subject to the merger.
For more information
If you would like some more information on EU Cross-Border Mergers, please contact Samantha Billingham at firstname.lastname@example.org or +44 (0)1392 687641 or Philip Newhouse at email@example.com or +44 (0)20 76594645.