Cross-border mergers: Have you considered the alternative?Print publication
Walker Morris recently advised on a cross-merger involving a UK company using the cross-border merger procedure. This is a procedure by which all assets and liabilities of the transferor company are automatically transferred to the transferee company and the transferor company then ceases to exist without the need for it to go into liquidation. This is a different process from the conventional acquisitions and disposals process well known in this country. Cross-border mergers, as introduced by the EU Merger Directive, are still something of a rarity in the UK although they are starting to gain in popularity. There may be benefits to proceeding by way of a cross-border merger, provided the threshold conditions apply.
The threshold requirements and the different types of merger
In order to be able to use the procedure, the merger must involve at least two companies governed by the laws of different EU Member States. The Directive recognises three types of merger:
- merger by absorption: one or more transferor companies transfers all their assets and liabilities to an existing transferee company;
- merger by absorption of a wholly owned subsidiary: a wholly owned subsidiary transfers all of its assets and liabilities to its parent company;
- merger by formation of a new company: two or more transferor companies are dissolved without going into liquidation and transfer all of their assets and liabilities to a new special purpose company.
The UK company can be either the transferor company or the transferee company.
The benefits of a cross-border merger
- In a conventional asset purchase subject to English law, consent is required to the transfer of contracts (their ‘novation’) to the transferee. This involves delay, cost and uncertainty. In the case of a cross-border merger, all assets and liabilities transfer automatically to the transferee without the need for third party consent. A cross-border merger will be particularly beneficial in cases where there are numerous contracts to be transferred.
- A further benefit from the automatic transfer of assets and liabilities is that it removes the risk of the parties failing to identify an asset or liability that ought to be transferred as part of the transaction.
- There is no need to appoint a liquidator and commence a members’ voluntary liquidation of the transferor company as it dissolves automatically, resulting in savings of costs and time.
To date, most cross-border mergers in the UK have been internal group reorganisations, although the procedure may also be worth considering where an acquiring company wants to integrate an existing unrelated business with its own business.
The process may be particularly attractive in the context of insurance businesses, where the portfolio transfer may be combined effectively with the cross-border merger process.
There will of course be tax considerations to take into account when deciding whether to use the cross-border merger procedure.
From start to finish a cross-border merger involving a UK company will typically take around six months, although the process can be completed more quickly than this. The process requires the involvement of the High Court so, as with any corporate procedure that involves court sanction, it is sensible to begin by drawing up a timetable.
The following bullet points are a summary of the principal elements of the process:
- the directors of the UK company must draw up and adopt draft terms of merger and a directors’ report detailing the effects of the merger on members, creditors and employees;
- an independent expert’s report as to the reasonableness of the valuation methods and share-to-share exchange ratio is required (there are some exceptions to this requirement);
- an application to court for a hearing date for the first stage of the application, where the court will summon a shareholders’ meeting to consider and, if thought fit, approve the terms of the merger;
- at least two months before the convening of the shareholders’ meeting, delivery of the draft terms of the merger to Companies House, which in turn notifies the Gazette to publish a notice of the proposed transfer. At the same time, employee representatives must be sent a copy of the directors’ report and notified that they are entitled to deliver an opinion on the report;
- at least one month before the shareholders’ meeting, the draft terms of merger, directors’ report and, if applicable, independent expert’s report must be made available to the members and employee representatives;
- the terms of the merger must be approved by a majority in number, representing 75 per cent or more in value of each class of members of the UK company present and voting in person or by proxy at the shareholder’s meeting;
- creditors can apply to court to request a creditors’ meeting to be summoned. If a creditors’ meeting is summoned, the terms of the merger must be approved by a majority in number, representing 75 per cent or more in value of the creditors or class of creditors.
The procedural requirements will vary depending on the specific circumstances of each merger but the two main areas which may entail delay are the potential involvement of creditors and the employee participation – something which is quite common on the Continent but is less familiar in UK M&A.
How we can help
The Walker Morris Corporate team has experience advising on cross-border mergers under the Merger Directive and would welcome the opportunity of exploring with you the possible benefits of using this procedure, particularly if you are considering a multi-jurisdictional corporate restructure involving companies incorporated in two or more EU Member States.