How will a no-deal Brexit affect cross-border mergers?

As 29 March 2019 edges closer with an ever increasing possibility of the UK leaving the EU without a deal, research suggests that there has already been a marked increase in UK registered companies seeking to complete cross-border mergers with companies registered in other EEA states prior to exit day.

The current framework for cross-border mergers is provided by the Companies (Cross-Border Mergers) Regulations 2007 (the “Regulations”) and EU legislation. The Regulations apply where a UK company is involved in a merger with one or more companies registered in an EEA state.

If a withdrawal agreement is concluded then it is possible that the UK will continue to be treated as an EEA state for the purposes of the Regulations during the transition period. However, this is yet to be confirmed.

The position is somewhat clearer in respect of a no-deal scenario. The Department for Business, Energy and Industrial Strategy (BEIS) has announced that in the event of the UK leaving the EU without a deal, the Regulations will be revoked on exit day, and as the UK will no longer be an EU member state, the remaining EU member states will no longer be required to give effect to cross-border mergers that do not complete prior to the UK exiting the EU.

Since their implementation, the Regulations have provided a very useful tool for UK and EEA registered companies as they provide a cost effective and efficient process for restructuring businesses across the EU. However, complex cross-border mergers which require employee participation can take six to twelve months to complete whilst even straightforward transactions may take several months due to the procedural requirements of the Regulations. With a no-deal exit on the cards, this leaves very little time for UK registered companies to complete mergers under the Regulations.

The Regulations provide three methods for completing a cross-border merger.

Merger by absorption

A cross-border merger by absorption is the process by which an existing company absorbs one or more other merging companies. The transferor company is dissolved and it transfers all of its assets and liabilities to the transferee company (including its employees). Consideration for the transfer is usually in the form of shares in the capital of the transferee company and/or a cash payment to the members of the transferor company.

Merger by absorption of a wholly owned subsidiary

This process is similar to that detailed above but involves a company transferring all of its assets and liabilities to another company which holds all the shares or other securities (i.e. a parent company).

Merger by formation of a new company

In this scenario a new transferee company is incorporated for the specific purpose of the merger. Each transferor company is dissolved and transfers all its assets and liabilities to the new transferee company. Again, the consideration for the transfer is likely to be shares in the transferee company and/or a cash payment to the members of the transferor company.

In each of these scenarios, the transferor company is dissolved without going into liquidation. There is also no need to obtain third party consents or formal assignments to transfer the transferor’s assets and liabilities as this takes place automatically by law. This means that the cross-border merger process provided for by the Regulations is far more straightforward and cost effective than the process of liquidation.

It is important to note that each of these methods may have varying tax implications and the advice of a multi-jurisdictional tax advisor should be sought from the outset of the proposed transaction.

The Regulations prescribe a number of pre-merger actions which must be completed prior to the transaction taking place. The pre-merger actions that the UK registered company must complete include:

1. Preparing and adopting the draft terms of the merger;

2. Preparing and adopting a report of the directors which sets out:

1. the consequences of the transaction on the company’s key stakeholders (shareholders, creditors, etc.);
2. the legal and financial basis for the merger, and
3. any disclosures made by the company directors regarding any personal interests that they have in the merger;

3. Submitting an application to the court for an order convening a shareholders’ meeting to approve the transaction;

4. Filing the court order and the draft terms of the transaction at Companies House; and

5. The terms of the merger being agreed by at least 75% of the company’s shareholders.

In addition to these requirements, a number of EEA states provide a statutory right for employee participation. The UK does not provide such a right but a company can agree to implement similar voluntary arrangements. The reasoning behind the employee participation requirements is to ensure, where such rights exist in the transferor, they will continue to subsist in the transferee after the merger. To illustrate, if a transferor incorporated in an EEA state with statutory employee participation mergers with a UK transferee, after the merger the UK employees may acquire rights to participate at board level. Understandably this is an area subject to much negotiation and therefore this has a significant impact on the timetabling of certain transactions.

Once the pre-merger actions have been carried out, the proposed merger is reviewed by the court to ensure the formalities have been complied with. It is important that the director’s report clearly evidences the benefits of the proposed merger as this will be examined closely by the court. If the court is satisfied it will issue a pre-merger certificate. The certificate must usually be filed at Companies House within seven days of the order being made.

If a UK registered company wants to be certain that it can rely on the Regulations to effect a cross-border merger it should ensure the transaction is completed before 29 March 2019.

If you need advice in connection with a cross-border merger or other corporate transactions, please contact our Corporate Transactions team