United States: Legal Structure Of Business Transfers

Having assessed their existing legal entity structure, client base, and options for remaining in the U.K., firms wishing to maintain current delivery methods to EU customers may still identify the need to transfer certain of their business lines to an existing or newly established EU affiliate after Brexit. There are a number of methods by which business may be transferred.

Novation of Existing Contracts

Novation is a means by which rights and obligations of a U.K. entity can be transferred to an EU entity. Under a novation, the existing or newly established EU entity would take on the rights and obligations of the U.K. entity. Novation can also be used to transfer rights and obligations from EU entities to U.K. entities. Since novation involves the replacement of an existing contract with a new contract and the extinguishment of the old contract, it is also only valid if express consent to the novation is obtained from the counterparty. Novation can, therefore, be impractical and costly where multiple contracts are involved, as it would require individual novation agreements for each client.

FSMA Part VII Transfer to Non-UK Entity or UK SPV

Where banking business is to be transferred, Part VII of the Financial Services and Markets Act 2000 sets out a statutory scheme for the transfer of banking business (in whole or in part) to another legal entity via court process1. The procedure under Part VII of FSMA is a well-established mechanism for transferring banking business with a deposit-taking element and of insurance businesses. The Part VII transfer does not involve the negotiation of individual novation agreements and does not require the transferor to solicit consent.

There is no precedent in banking for an entire business transfer to an entity outside the U.K., but such a transfer is contemplated by FSMA. It is possible, however, at least in theory, to transfer banking business to an entity established in another EU member state under the Part VII procedure. For insurance, cross-border transfers between EU member states under Part VII are supported by the Solvency II directive, so should also be feasible.] Furthermore, if the transfer is done prior to the date of the U.K.'s withdrawal from the EU, the courts of the member state in which the transferee is established must recognise the transfer under the recast Brussels Regulation2.

Cross-Border Merger

U.K. firms wishing to transfer operations into the EU, or EU firms wishing to transfer operations to the U.K., could conduct a merger under the Cross Border Mergers Directive3 provided that the merger is between at least two companies incorporated in different EEA states. The effect of a cross-border merger is that one or more of the companies is dissolved, leaving one surviving entity post-merger. The cross-border merger can therefore be effected in order to leave the surviving entity in the jurisdiction of choice.

Societas Europaea

Traditional U.K.-incorporated companies cannot be re-domiciled into the EU. However, it is possible to re-domicile the head office of a Societas Europaea (SE) from one EEA state to another without resulting in the winding up of the SE or the creation of a new legal person. SEs can be registered in any EU member state and can exercise free movement rights within the EU to change their corporate domicile. It is open therefore for U.K. firms which are public companies to convert to SE status or establish a SE while the U.K. remains an EEA state and then re-domicile the head office of the SE to another EU member state prior to the U.K.'s withdrawal from the EU. Similarly, prior to Brexit, EU-based firms may relocate to the U.K. using this structure.

Under the SE Regulation4, an existing public limited company formed under the law of a member state and which has its registered office and head office in an EEA member state, may convert into an SE provided that for at least two years it has had a subsidiary governed by the law of another member state. An SE can also be formed by (i) merger of two or more public limited companies incorporated in different EEA states; (ii) formation of a holding SE by two or more private or public limited companies incorporated in different EEA states; or (iii) formation of a subsidiary SE by two or more companies, firms or other legal bodies in different EEA states subscribing for the shares of the subsidiary.

Footnotes

1 Part VII, FSMA, can also be used to effect transfers of insurance business. Cross-Border transfers of insurance business are governed under the EU Solvency II regime, which has been incorporated into Part VII, FSMA.

2 Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).

3 Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC), implemented in the UK by the Companies (Cross-Border Mergers) Regulations 2007.

4 Regulation (2157/2001) on the Statute for a European Company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Barnabas W.B. Reynolds
 
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