What is a cross-border merger?
When and why have cross-border mergers been used?
How are cross-border mergers structured?
Who can participate in a cross-border merger?
How is a cross-border merger completed?
What are the consequences of a cross-border merger?
Can a cross-border merger be completed notwithstanding contractual obligations or other restrictions on transfer?
How long does it take to complete a cross-border merger?
A cross-border merger is a transaction involving a true merger of European entities, in which one or more of the participants ceases to exist.
In the United Kingdom, cross-border mergers are governed by the Companies (Cross-Border Mergers) Regulations 2007 (as amended), which implement the EU Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC).
The procedure has been frequently implemented in connection with solvent reorganisations of group structures. Arm’s-length cross-border transactions involving UK companies have also incorporated cross-border mergers. For example, Liberty Global’s takeover of Cable & Wireless Communications and the combination of Technip and FMC Technologies under TechnipFMC (a UK-incorporated company) both involved cross-border mergers.
The procedure simplifies the reorganisation of a European group structure by:
- being able to fix the completion of several combinations at a single time;
- avoiding liquidations of group entities; and
- allowing for assets and liabilities to transfer by operation of law without the need for novation of contracts or other mechanisms to transfer title.
In the context of an arm’s-length transaction, the procedure can facilitate commercial goals relating to the establishment of the statutory jurisdiction of the parent of the post-transaction group.
The regulations permit three types of cross-border merger:
- Merger by absorption – at least one company (the transferor) is dissolved without going into liquidation and its assets and liabilities are transferred to another company (the transferee) in consideration for the issue of shares, and a cash payment made, to shareholders of the transferor participant(s). Mergers of affiliates or of a parent company into its wholly-owned subsidiary are mergers by absorption.
- Merger by absorption of a wholly owned subsidiary – a wholly owned subsidiary is absorbed by its parent and ceases to exist, and whose assets and liabilities are transferred to its parent.
- Merger by formation of a new company – two or more companies (the transferors) cease to exist and whose assets and liabilities are transferred to a company formed for the purposes of the merger in consideration for the issue of shares, and if agreed a cash payment made, to shareholders of the transferors.
Limited liability companies governed by the laws of member states of the European Economic Area can participate in cross-border mergers. Certain corporate forms therefore fall outside the scope of the directive.
For the regulations to apply, one of the participants must be a ‘company’ pursuant to the Companies Act (other than a company limited by guarantee without a share capital or a company being wound up) or a limited liability partnership.
Under the regulations, a cross-border merger consists of two stages:
- obtaining pre-merger certificates, which requires each participant in the cross-border merger to obtain confirmation from the relevant competent authority in its own jurisdiction that all relevant pre-merger steps have been completed; and
- obtaining final approval of the cross-border merger from the competent authority in the jurisdiction of the transferee company surviving upon completion of the cross-border merger. Under the regulations, the High Court is the competent authority.
For a UK participant to obtain a pre-merger certificate under the regulations:
- the directors of the UK participant must draw up and adopt draft merger terms and a report explaining the effect of the cross-border merger;
- an independent expert’s report may have to be drawn up, including, among other things, an opinion as to whether the exchange ratio – and the methods used to arrive at it – are reasonable;
- the draft merger terms must be filed with the registrar of companies and put on display with the directors’ and independent expert reports, all of which must be circulated to shareholders and creditors before any meeting to approve the cross-border merger;
- the UK participant’s shareholders must approve the cross-border merger at a meeting ordered by the court; and
- the UK participant’s creditors must approve the cross-border merger if a meeting is ordered by the court.
All assets and liabilities of the transferor(s) become the assets and liabilities of the surviving transferee by operation of law, resulting in a true merger of the participants.
Employees of a transferor will become employees of the surviving transferee. Employees may be negatively affected by a cross-border merger to the extent that the post-merger employer is financially weaker or the legislative employment rights in the jurisdiction of the transferee provide less protection than in the jurisdiction of the transferor(s).
Creditors of a transferor will become creditors of the surviving transferee. By combining the creditors of the transferor(s) with those of the surviving transferee, there may be rights of security competition over the assets of the enlarged transferee.
In principle, yes. However, completion of a cross-border merger could result in liability for breach of contract if contractual restrictions in respect of a merger exist. For example, if the cross-border merger resulted in a change of control under a finance facility, the failure to obtain consent from the lenders may trigger an event of default, liability for which would be inherited by the surviving transferee. The regulations provide that the surviving transferee must take such actions required by law to perfect the transfer of assets and liabilities of any transferor.
Approximately five months should be allowed for the completion of a cross-border merger. A longer period may be needed if there are large numbers of participants in different jurisdictions, employee consultations are triggered or potential consequences of completion of the cross-border merger could trigger the need to obtain counterparty consent.
As cross-border mergers may cease to be available in the United Kingdom after Brexit, any procedure should be commenced by Summer 2018.
The key milestones of a cross-border merger under the regulations are as follows:
- Preparation – Drafting the cross-border merger terms, directors’ report and expert’s report.
- Court hearing – Application to court to convene a shareholder meeting to approve the merger (Companies (Cross-Border Mergers) Regulations, Regulation 11).
- No less than two months before the shareholder meeting – Filing of documents with Companies House (Companies (Cross-Border Mergers) Regulations, Regulation 12).
- No less than one month before the shareholder meeting – Companies House publishes details of the merger and documents are made available for inspection (Companies (Cross-Border Mergers) Regulations, Regulation 12).
- Shareholder meeting – Court convened shareholder meeting to approve the merger by a majority in number representing 75% in value of each class of members of the UK participant (Companies (Cross-Border Mergers) Regulations, Regulation 13).
- Court hearing – Application to court to obtain an order certifying that the pre-merger requirements have been satisfied (Companies (Cross-Border Mergers) Regulations, Regulation 6).
In addition, if the UK participant is the transferee:
- Joint application to court – Joint application to court for an order certifying completion of the cross-border merger (Companies (Cross-Border Mergers) Regulations, Regulation 16).
- Filing of court order – Court order to be filed with Companies House (Companies (Cross-Border Mergers) Regulations, Regulation 18).
- 21 days after court order – Merger becomes legally effective (Companies (Cross-Border Mergers) Regulations, Regulation 16).
For further information on this topic please contact Will Pearce or Simon J Little at Davis Polk & Wardwell LLP by telephone (+44 20 7418 1300) or email (email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell LLP website can be accessed at www.davispolk.com.
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