Cross Border Mergers by operation of law - EU Directive 2005/56
The EU Directive on Cross Border Mergers of Limited Liability Companies (2005/56/EC) (the Directive) provides a mechanism whereby qualifying companies can effect mergers by operation of law. The Directive applies to mergers where there are at least two companies from different EU member states. It applies to public and private companies with limited liability, including Societas Europaea (the "SE"), the EU public limited company created pursuant to EU Regulation 2157/2001 on the Statute for a European Company. In the UK the Directive has been implemented by The Companies Cross Border Mergers Regulations 2007 (SI 2007/2974) (as amended) (CCBMR) and there is similar enabling legislation across the EU Member States. In principle the Directive creates a harmonised EU wide system for effecting a "statutory" merger by operation of law. However, there remain a number of discrepancies across the EU member states in terms of the precise translation of the Directive into national legislation.
Fieldfisher has developed a team across its European offices with extensive knowledge and experience of the differences between the national implementing legislation enabling us to provide advise clients on the effective implementation of cross border mergers under the Directive. This briefing note sets out some of our recent ground breaking experience.
Regulation 2(2)(a) of the Directive, defines three types of "merger" being a merger by absorption, a merger by absorption of a wholly owned subsidiary and a merger by formation of a new company.
Under the Directive a merger by absorption is where a company transfers all of its assets and liabilities to another existing company in exchange for the issue to the disposing company’s members of securities or shares in the capital of the acquiring company and, if applicable, a cash payment. Under CCBMR a merger by absorption occurs where (i) there are one or more transferor companies; (ii) there is an existing transferee company; (iii) at least one of those companies was a UK company; (iv) at least one of those companies was an EEA company; (v) every transferor company is dissolved without going into liquidation, and on its dissolution transfers all its assets and liabilities to the transferee company; and (vi) the consideration for the transfer is: shares or other securities representing the capital of the transferee company, and if so agreed, a cash payment, receivable by members of the transferor company.
Olympus UK Ltd and others - Terms for Merger by Absorption
Fieldfisher's UK and German offices recently advised in Olympus UK Ltd and others on a ground breaking case involving the merger of a parent and subsidiary combination, as two transferor companies, into a German acquiring company. All of the merging entities had the same ultimate parent company.
The merger of the two UK companies, OUK and its parent, OUKH were structured as mergers by absorption whereby OUKH and OUK's assets and liabilities would be transferred by operation of law to a German company (OEPM) and OUKH respectively. OUK was to be dissolved without liquidation.
In addition the merger of ONL was also a merger by absorption under which the assets and liabilities of ONL would be transferred by operation of law to a Societas Europaea registered in Germany (OEMSE), of which OEHSE was the sole shareholder. ONL was to be dissolved without liquidation.
Whilst the Directive and CCBMR provide in each case, for the transfer of assets by the transferor company in exchange for consideration, under the German implementing legislation OEPM or OEMSE as transferee companies were not obliged to issue consideration, namely shares to the shareholders in the transferor companies where such shareholders had waived their entitlement to receive consideration.
The English court had to consider whether the proposed terms of merger, whereby consideration would be waived, would be compliant with, and effective under, CCBMR as CCBMR did not expressly provide for the waiver of consideration.
The Fieldfisher team in UK, Germany, France and Belgium worked together seamlessly to provide the English court with substantive evidence to support the principles upon which EU legislation and national law should be interpreted by a national court, namely so that national law is, so far as possible, interpreted in the light of the wording and purpose of the relevant directive in order to achieve the result pursued by the directive. Fieldfisher successfully obtained a court order in England enabling the merger to proceed. This was a ground breaking finding by the English court to read CCBMR purposively to give effect to the Directive. Whilst there were differences between CCBMR and the Directive in terms of the words and expressions used the English court found that CCBMR should not be narrowly construed where the Directive was interpreted more widely in other member states. In particular, the German law predated the Directive and was considered to have, to some degree, shaped the objectives of the Directive.
The English court recognised that under Article 2(2)(a) of the Directive, a requirement for a merger by absorption was the "issue" of securities. The English court recognised that “issue” had a broader meaning in some EU member states than perhaps it did in the UK. In particular, the French and German texts of the Directive gave those words a broader meaning than under English law. The flexibility in terms of what was required to be made available to the shareholders of the transferor, which appeared to be offered by the German and French versions of the Directive, justified taking the most liberal interpretation consistent with the objectives of the Directive as it would not be consistent for stricter obligations to be imposed in some Member States than in others. CCBMR also provided for consideration to be "receivable by members of the transferor company". These words were considered to be open to different interpretations but seemed to suggest that the intention behind the words may have been to leave open the ability for a waiver, as was allowed under German law.
The English court did however recognise that the scope of this decision may be restricted to cross border mergers in a wholly owned group structure. This has been a ground breaking case highlighting the intention of the court, wherever it feels able to do so, to apply a purposive approach to English implementing legislation, in this case to ensure a common and truly harmonised approach across EU member states. This will be relevant in the event that other areas of inconsistency in CCBMR become the subject of judicial interpretation. It is also a helpful decision in clarifying the structure that a merger by absorption may take where the merging entities have a common ultimate parent.
Re Lanber Properties LLP & Lanber II GmbH - the application of the Directive to Limited Liability Partnerships
In the UK, Regulation 46 of the Limited Liability Partnerships (Application of Companies Act 2006) 2009 Regulations applies the CCBMR with some modifications to Limited Liability Partnerships in the UK. As such a merger by absorption is an operation in which the consideration for the transfer of the assets and liabilities of the transferor is (i) members of the [transferor company] becoming members of the transferee LLP, and (ii) if so agreed, a cash payment receivable by members of the [transferor company]. Fieldfisher's UK and German teams again advised in relation to Re Lanber Properties LLP & Lanber II GmbH where the English court held that the consideration paid complied with CCBMR, as amended for LLPs, even though the members of the two German transferor companies could not become members of the UK transferee LLP because they were already members of it.
The draft terms of merger provided that the members of each of the transferor companies would be credited with having made an "additional contribution" to the capital of the transferee LLP, equal to the nominal value of the share capital held by them in the transferor companies. The function of the English court when asked to approve a cross border merger under Regulation 16 of CCBMR required the court to satisfy itself that there has been substantial, rather than just formal, compliance with all relevant steps set out in Regulation 16 CCBMR. The judge in Lanber agreed with the decision in Olympus. Where the terms of merger included an express provision to deem an additional contribution to be treated as having been made, the English court considered that to be sufficient, applying regulation 2(2)(f) purposively to bring the consideration within the terms of regulation 2 CCBMR (as modified for LLPs).
The cases show that the English courts, will, in so far as they are able, try to find a purposive approach to ensure a consistent approach across the EU member states. Your Fieldfisher team is able to provide strategic advice on all aspects of pan European interpretation of the Directive.