Mergers under the Companies (Cross- Border Mergers) Regulations 2007 Elizabeth Wall & Frank Lennox-Hennessy

 Required to comply with the European Directive of 2005 on cross-border mergers of limited liability companies  Brought into force in UK on 15 December 2007  Now possible for public and private UK companies to be involved in a true merger with an EEA cross- border element  A&O advised on one of the first mergers to be completed under the Regulations  All such mergers so far have been intra-group The Companies (Cross-Border Mergers) Regulations 2007

What is a merger?  Coming together of two or more entities to form a single entity with the assets and liabilities of each absorbed entity transferred to the surviving entity by operation of law (universal succession) Company ACompany BCompany ACompany B all assets and liabilities transferred by operation of law Company B (including all assets and liabilities of former Company A) Company A (dissolved) Pre-Merger Merger Post-Merger  Universal succession mergers commonplace in most of continental Europe

How does a merger differ from an acquisition?  From a commercial standpoint many "mergers" have occurred under s.895 of the Companies Act 2006 (formerly s.425 CA 1985) but in reality such "mergers" were acquisitions of the entire issued share capital  Under acquisition structure subsequent steps required to place all assets and liabilities into one entity (i.e. post-completion hive-up of assets and liabilities) Company ACompany B Pre-AcquisitionPost-Acquisition Company A (still in existence and possessing all of its assets and liabilities)

 Across European borders  The European Company: Societas Europaea (SE)  Within UK  Long possible under s.900 CA 2006 for two UK companies to merge (formerly s.427 CA 1985 and previously s.208 CA 1948)  But in cases such as Nokes v Doncaster (1940) the courts indicated that these statutory provisions could not transfer assets and liabilities where the transfer would otherwise require consent of a third party  So not possible to transfer non-assignable contracts with any certainty under domestic merger provisions  Sections rendered dormant but recent progressive approach to insurance and banking business transfers under Financial Services and Markets Act 2000 likely to be followed in relation to cross-border mergers Were mergers involving UK companies previously possible?

Shareholders German Transferor UK Transferee Transferor Shareholders (shares and possibly cash) Transferee Shareholders Assets & liabilities German Transferor dissolved 1. Merger by absorption The three types of cross-border merger

Italian Transferor UK Transferee Shares Assets & liabilities Italian Transferor dissolved 2. Merger by absorption of a wholly-owned subsidiary The three types of cross-border merger

Shareholders Dutch Transferor UK Transferor Assets & liabilities Dutch Transferor UK Transferor UK Transferee (Newco) Dutch Transferor Shareholders UK Transferor Shareholders Dutch Transferor Shareholders (shares and possibly cash) Dutch Transferor dissolved UK Transferor dissolved UK Transferee (Newco) UK Transferor Shareholders (shares and possibly cash) 3. Merger by formation of a new company The three types of cross-border merger

Overview of timetable and procedure  Two procedural stages i.each transferor and the transferee obtain certificates from the "competent authority" in their jurisdiction certifying that the pre-merger steps have been completed (the Pre-Merger Certificates) ii.the transferee company applies to its competent authority for the sanction of the merger  In England and Wales the competent authority is the High Court  In certain other jurisdictions the competent authority is a notary

Case study: Intra-group merger of UK asset manager and German asset manager FSA (English regulator) UK parent company BaFin (German regulator) UK asset manager German asset manager FSA UK asset manager (passport pursuant to MiFID) German branch of UK asset manager UK parent company Post-merger Pre-merger BaFin

Simplified timeline of events Due diligence on contracts to be transferred Issue: whether English, German and Austrian law governed contracts can be transferred pursuant to merger Draft terms of merger submitted to Companies House and notice published in London Gazette Directors' report sent to all UK co. employees by Firm decision to proceed Key documents drafted: - draft terms of merger - directors’ report - independent expert’s report? Draft terms of merger and directors' report translated Draft terms submitted to German registrar and directors' report sent to German co. employees Case study: Intra-group merger of UK asset manager and German asset manager Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting

Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting Simplified timeline of events Due diligence on contracts to be transferred Issue: whether English, German and Austrian law governed contracts can be transferred pursuant to merger Draft terms of merger submitted to Companies House and notice published in London Gazette Directors' report sent to all UK co. employees by Firm decision to proceed Key documents drafted: - draft terms of merger - directors’ report - independent expert’s report? Draft terms of merger and directors' report translated Draft terms submitted to German registrar and directors' report sent to German co. employees Case study: Intra-group merger of UK asset manager and German asset manager UK co. shareholder meeting to approve merger and waive requirement for independent expert's report

Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting Simplified timeline of events Due diligence on contracts to be transferred Issue: whether English, German and Austrian law governed contracts can be transferred pursuant to merger Draft terms of merger submitted to Companies House and notice published in London Gazette Directors' report sent to all UK co. employees by Firm decision to proceed Key documents drafted: - draft terms of merger - directors’ report - independent expert’s report? Draft terms of merger and directors' report translated Draft terms submitted to German registrar and directors' report sent to German co. employees Case study: Intra-group merger of UK asset manager and German asset manager UK co. shareholder meeting to approve merger and waive requirement for independent expert's report

Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting Simplified timeline of events Draft terms of merger submitted to Companies House and notice published in London Gazette Directors' report sent to all UK co. employees by Key documents drafted: - draft terms of merger - directors’ report - independent expert’s report? Draft terms of merger and directors' report translated Draft terms submitted to German registrar and directors' report sent to German co. employees Case study: Intra-group merger of UK asset manager and German asset manager UK co. shareholder meeting to approve merger and waive requirement for independent expert's report German co. meeting and execution of terms of merger (both in front of German notary)

Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting Simplified timeline of events Draft terms of merger submitted to Companies House and notice published in London Gazette Directors' report sent to all UK co. employees by Key documents drafted: - draft terms of merger - directors’ report - independent expert’s report? Draft terms of merger and directors' report translated Draft terms submitted to German registrar and directors' report sent to German co. employees Case study: Intra-group merger of UK asset manager and German asset manager UK co. shareholder meeting to approve merger and waive requirement for independent expert's report German co. meeting and execution of terms of merger (both in front of German notary)

Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting Simplified timeline of events Draft terms of merger submitted to Companies House and notice published in London Gazette Directors' report sent to all UK co. employees by Draft terms of merger and directors' report translated Draft terms submitted to German registrar and directors' report sent to German co. employees Case study: Intra-group merger of UK asset manager and German asset manager UK co. shareholder meeting to approve merger and waive requirement for independent expert's report German co. meeting and execution of terms of merger (both in front of German notary) Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate First English Court hearing and receipt of English pre-merger certificate

Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting Directors' report sent to all UK co. employees by Draft terms submitted to German registrar and directors' report sent to German co. employees UK co. shareholder meeting to approve merger and waive requirement for independent expert's report German co. meeting and execution of terms of merger (both in front of German notary) Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate German commercial registrar issues German pre-merger certificate Simplified timeline of events Case study: Intra-group merger of UK asset manager and German asset manager First English Court hearing and receipt of English pre-merger certificate

Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting Draft terms submitted to German registrar and directors' report sent to German co. employees UK co. shareholder meeting to approve merger and waive requirement for independent expert's report German co. meeting and execution of terms of merger (both in front of German notary) Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate German commercial registrar issues German pre-merger certificate Simplified timeline of events Case study: Intra-group merger of UK asset manager and German asset manager First English Court hearing and receipt of English pre-merger certificate Draft and submit second claim form and witness statement Second English Court hearing and receipt of order declaring merger effective

Draft and submit second claim form and witness statement Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting UK co. shareholder meeting to approve merger and waive requirement for independent expert's report German co. meeting and execution of terms of merger (both in front of German notary) Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate German commercial registrar issues German pre-merger certificate Simplified timeline of events Case study: Intra-group merger of UK asset manager and German asset manager First English Court hearing and receipt of English pre-merger certificate Second English Court hearing and receipt of order declaring merger effective

Second English Court hearing and receipt of order declaring merger effective Draft and submit second claim form and witness statement Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: UK co. shareholder approval not necessary but all timing requirements in the Regulations are by reference to date of shareholder meeting UK co. shareholder meeting to approve merger and waive requirement for independent expert's report German co. meeting and execution of terms of merger (both in front of German notary) Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate German commercial registrar issues German pre-merger certificate Simplified timeline of events Case study: Intra-group merger of UK asset manager and German asset manager First English Court hearing and receipt of English pre-merger certificate 23:59hrs Merger completed

23:59hrs Merger completed Second English Court hearing and receipt of order declaring merger effective Draft and submit second claim form and witness statement Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar German co. meeting and execution of terms of merger (both in front of German notary) Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate German commercial registrar issues German pre-merger certificate Simplified timeline of events Case study: Intra-group merger of UK asset manager and German asset manager First English Court hearing and receipt of English pre-merger certificate

23:59hrs Merger completed Second English Court hearing and receipt of order declaring merger effective Draft and submit second claim form and witness statement Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate German commercial registrar issues German pre-merger certificate Simplified timeline of events Case study: Intra-group merger of UK asset manager and German asset manager First English Court hearing and receipt of English pre-merger certificate

23:59hrs Merger completed Second English Court hearing and receipt of order declaring merger effective Draft and submit second claim form and witness statement Draft and submit first claim form and witness statement to English Court and similar documents to German commercial registrar Issue: German commercial registrar subject to no fixed time period to issue German pre-merger certificate German commercial registrar issues German pre-merger certificate Simplified timeline of events Case study: Intra-group merger of UK asset manager and German asset manager First English Court hearing and receipt of English pre-merger certificate

Examples of other mergers to date  Large British bank  merged Polish company into an English company  passported branch of English company to Poland  allegedly motivated by intention to expand Polish business without transferring substantial capital to Poland UK bank FSA UK Parent Company Polish branch of UK bank Polish regulator (passport pursuant to MiFID)

 Large American bank  merged Italian subsidiary into English company  passported branch of English company to Italy  presumably driven by similar motivations as merger described in case study Examples of other mergers to date (cont'd) UK bank (unlimited company) FSA US Parent Company Italian branch of UK bank Italian regulator (passport pursuant to MiFID)

 Large UK insurer  effected a combined FSMA 2000 Part VII transfer and merger to consolidate an Irish company in run-off into a UK company  aim to create a well capitalised insurance underwriting platform with a capital efficient structure  merger meant no liquidation of redundant Irish company required Examples of other mergers to date (cont'd) Irish Company Irish regulator UK Parent Company UK Company (including former Irish business) UK Company FSA Pre-Merger Post-Merger FSA UK Parent Company

Examples of other mergers to date (cont'd)  Belgian biotech group  merged Irish wholly-owned subsidiary into Belgian company  business of Irish subsidiary continued as a branch  reduced group's administrative costs by eliminating requirements for Irish company to produce audited accounts and maintain board directors (€200,000 p.a.)  preservation of past losses for ongoing tax purposes

 Large US industrial company  merged German company into a Dutch company  most tax efficient means of transferring German company’s shareholdings in several significant subsidiaries to Dutch company as part of a wider tax driven restructuring  German notary agreed to waive certain statutory time periods upon receipt of waiver from German company’s two creditors Examples of other mergers to date (cont'd)

Other possible applications  Restructuring and insolvency  gain access to the restructuring or insolvency laws of a particular Member State  choose Member State that provides for the flexibility and legal means to do as the parties propose  To simplify group structures  means of removing dormant or superfluous companies  potential savings in audit fees, management time and other costs

Potential issues: Creditors  Creditors’ position likely to be considered carefully at first hearing  Particular concern where transferee is not a UK company  Possible imposition of creditor protection mechanisms or appointment of a process agent  In intra-group mergers to date the court has been satisfied by production of transferor’s and transferee’s balance sheets  Security issues

Potential issues: Tax  European Mergers Tax Directive (the "Tax Directive")  Provides for cross-border mergers to be tax neutral for shareholders and the transferor company provided that the assets of the transferor remain within the charge to tax in its jurisdiction of residence  Otherwise may be possible to rely on a domestic exemption in the transferor's home state  Note that certain tax reliefs introduced by the Tax Directive are dependent on the merger not being effected for tax avoidance purposes

Potential issues: Employee participation rights  Rights protected where they exist in any of the merging companies  Possible rights:  mandatory representation on board (Germany, Sweden)  to recommend/oppose board appointments (Netherlands)  none (UK)  Two options where rights exist:  adopt standard rules on employee participation  negotiate for up to 12 months with special negotiating body  No court approval until employee participation arrangements determined

Third party mergers under the Regulations  Regulations may be used in the future to effect mergers between third parties  Obvious advantage is that all assets and liabilities of merging companies are placed in one surviving company  Previously English law required two steps to "merge" two companies (e.g. scheme followed by hive-up) but now just one stage  Should have been possible under a scheme by virtue of s.900 CA 2006 but prevented by Nokes v Doncaster (1940)  Takeover Code and Prospectus Rules apply in usual way Watch this space!

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