EU cross-border mergers: a potentially useful tool for group restructurings

We are often asked by our international clients about the possibility of rationalising group structures through the merger of existing subsidiaries. Generally speaking, English law does not recognise the concept of a “statutory” merger.  These are common in other jurisdictions, notably the US, where one or more merging companies cease to have corporate existence as a result of the merger and there is an automatic assumption of assets and liabilities by the surviving company. However, this general position is subject to an important exception introduced by EU law, which is being used more and more in practice by groups looking to restructure their European operations.

Traditional restructuring “mergers” under English law

Under English law, a “merger” of two companies in a restructuring context would require a transfer or “hive up” up of the business and assets (and usually liabilities) of the UK company into another group company (usually a parent), and then (depending on a number of factors including financial position and creditor profile) the strike off or liquidation of the relevant “merged” company/companies. Under this process there is no automatic transfer of assets and liabilities to the surviving company and so steps will need to be taken to transfer relevant contracts, leases etc. This may involve obtaining third party consents, or entering into formal assignment or novation documentation, and, as with other situations where third parties are involved in a bilateral transaction, can involve additional delays and costs. As a result, practice does vary (depending on asset class and business importance) as to how extensive and/or formal engagement with third parties is.

Because the hive up will usually represent the transfer of a business, the Transfer of Undertaking (Protection of Employment) (TUPE) Regulations will likely be engaged, meaning that the employment of relevant employees transfers automatically to the surviving company. Where TUPE is engaged, there is an obligation to inform (and, in certain circumstances, consult) employees in relation to the transfer, although this is unlikely to pose significant issues in practice on an intra-group arrangement.

The EU cross-border merger regime

One important exception to the general position outlined above is that the Companies (Cross-Border Mergers) Regulations 2007 (implementing an EU directive on cross-border mergers) provide a legal framework for statutory mergers involving English companies. Under the Regulations, an English company can (with the approval of the Court) be absorbed into a company from another European Economic Area (EEA) jurisdiction and vice versa, with relevant assets and liabilities etc. being transferred by operation of law (see box below), and as such represents a potentially more streamlined process than a traditional hive up, particularly where third party consent issues etc. are acute.

The Regulations apply where a UK company is involved in a merger with one or more EEA companies. A UK company is essentially any company incorporated under the UK Companies Act, other than companies limited by guarantee (without a share capital) or those in the process of being wound up. The Regulations also apply (with appropriate modifications) to LLPs.

Whilst the Regulations can, and on occasion have, been used to implement transactional M&A deals (such as the aborted Northern Foods/Greencore takeover), the majority of transactions under the Regulations are intra-group restructurings.

Possible types of merger under the Regulations

The Regulations provide for three different types of merger:

• by absorption (where an existing company absorbs one or more other merging companies);
• by absorption of a wholly-owned subsidiary (where a more streamlined process is available to reflect the intra-group nature of the transaction); and
• by formation of a new company (where two or more companies merge to form a new company).

The Regulations provide for differing processes depending on whether the merger is “inbound”, where the non-UK company is the “transferor” company (i.e. it is merging into a UK company), or an “outbound” merger (where the UK company is the transferor). In broad terms, the competent authority of the jurisdiction of the transferee company will give final approval to the merger.

Timeline of a typical cross-border merger

A typical cross-border merger will take at least a few months to implement, in order to accommodate the procedural steps laid out in the Regulations. This involves public advertisement of the proposed merger in the London Gazette and at least one UK court hearing, depending on whether the merger is inbound or outbound. Because of the automatic transfer of assets and liabilities, any creditor of the UK entity entitled to apply to court require a separate creditors’ meeting to approve the merger.

Osborne Clarke expertise

We have extensive expertise on the structuring and implementation of both inbound and outbound cross-border mergers. If you would like to discuss how these could benefit your business, please get in touch with any of the experts set out below.