In a recent decision, the England and Wales High Court looked at the question whether a merger qualifies as a merger by absorption under the Companies (Cross-Border Mergers) Regulations 2007 even though the shareholders in the transferor company will not receive any consideration from the transferee company. The judge concluded that, in order to qualify as a merger by absorption, the right to be offered shares or cash in exchange for the transfer of the transferor company’s assets and liabilities could be waived by its members as long as the right of the transferor company to the shares or cash was recognised.
The Companies (Cross-Border Mergers) Regulations 2007 (the Regulations) state that a ‘merger by absorption’ means an operation in which:
- there are one or more transferor companies;
- there is an existing transferee company;
- at least one of those companies is a UK company;
- at least one of those companies is an EEA company;
- every transferor company is dissolved without going into liquidation, and on its dissolution transfers all its assets and liabilities to the transferee company; and
- 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.
The Regulations implement Directive 2005/56/EC on cross-border mergers of limited liability companies (the Directive) in the UK. The Court notes that, in comparison to the Regulations, the Directive appears to be more restrictive in its definition of merger by absorption in that it defines the term ‘merger’, among others, to mean an operation whereby:
(a) two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares;… [emphasis added]
The Directive does not contain an express provision for the members of the transferor company to waive their right to be issued such shares. The Court recognises that, under English law, shares are only issued (as apparently required by the Directive) when the allottee is entered in the company’s register of members in relation to the shares it subscribed for. However, the Court looks beyond interpretation of the Directive under English company law at the approaches adopted under German and French law and comes to the conclusion that the definition of cross-border merger does not require “an ‘issue of shares’ in the strict sense of that word in English company law”. Instead, in order to qualify as a merger by absorption, all that is required is that the right to be offered shares or cash in exchange for the transfer of the transferor company’s assets and liabilities be recognised, even though such right to shares or cash is simultaneously declined by all members of the transferor company.
This is an important decision for companies with wholly-owned pan-European group structures. Most cross-border mergers form part of intra-group restructurings of such group companies rather than arm’s length transactions, and the High Court decision in this regard is commercially sensible and to be welcomed. Although the judge emphasizes that the decision was reached without the benefit of adversarial argument, the case clarifies that in this context the issue of a token share or other security is not required.