20 September 2018

Brexit, Cross-Border Mergers And Societas Europaeas

Brodies LLP


Brodies LLP
Brexit was specifically mentioned as a factor behind the Liberty restructuring.
European Union Corporate/Commercial Law
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With the anticipated date of Brexit approaching, groups that operate in the UK and in the rest of Europe have had to consider whether it would be necessary or advantageous to restructure to enable them to conduct their business efficiently and profitably post-Brexit.

This blog looks at two recent cases in which the English courts were asked to approve restructuring carried out under two different EU regimes. In both cases, the court gave its approval despite the artificial inclusion of an overseas company in the structure in order to bring it within the scope of the relevant regime.

Cross-Border Mergers

This EU regime is implemented in the UK via the Companies (Cross-Border Mergers) Regulations 2007.

The Regulations can be an efficient way to implement mergers and reorganisations of multinational groups which contain at least one UK company and at least one company registered in another EEA state. In particular, the Regulations allow the court approving the merger to sanction transfers of contracts with third parties.

The process involves multiple steps including preparation of merger documents in prescribed form and applications to commercial courts in the UK and the relevant EEA states. In practice, the Regulations have been more commonly used to implement group reorganisations rather than mergers with external entities.

Easynet case

This case involved the cross-border merger of a number of UK companies and a dormant Dutch company into a UK transferee company.

The Dutch company already existed but was only being included in the transaction to bring the transaction within the scope of the Regulations. The question for the Court was whether this was an abuse of law – that is to say whether the transaction involved taking advantage of legal rules for an illegitimate purpose.

The High Court judge who reviewed Easynet's application refused to sign off on it on the basis that it was not "in reality" a cross-border merger, because the Dutch company was not active in any way.

Even if that was not the case, he would have refused approval on the basis that the artifice involved justified the court exercising its discretion to refuse approval.

The Court of Appeal reversed that judgment, concluding that Easynet's proposal was not an abuse of law.

To prevent the application of the Regulations would, said the court, be an inappropriate restriction on the EU legal principle of freedom of establishment in any Member State.

The purpose of the EU regime on cross-border mergers (as implemented by the Regulations) was to set ground rules and to facilitate mergers of companies across EU Member States. The ground rules were there to protect existing employees, creditors and other stakeholders and did not require a corporate group to have substantial operations in every member state it is established in.

The Societas Europaea (SE)

An SE is a public limited company formed under a separate EU regulation, which can be registered in any of the EEA states.

The SE Regulation sets out different ways of forming an SE, most of which involve a requirement to have two companies in two different member states.

One advantage of an SE is that it can transfer its registered office to another member state without resulting in the winding up of the SE or the requirement to incorporate a new legal person.

Still, the SE has not proved popular in the UK to date, with fewer than 50 being registered in the UK.

Liberty case

Liberty Mutual Insurance Europe Plc, a UK company, wanted to become an SE. As stated to the court, becoming an SE was part of Liberty's planning for the consequences of Brexit.

Liberty chose to form an SE by merging two public limited companies from two different member states. To meet the requirement for a second plc, it set up a company in Luxembourg. This is in contrast to the Easynet case, where the Dutch company already existed.

The Luxembourgish company had never traded, had few assets and liabilities, and would cease to exist when the merger was complete and the SE created. Its creation was pure artifice.

Again the question was whether this was an abuse of law.

Following the Court of Appeal's reasoning in Easynet, the English High Court did not consider Liberty's actions to be an abuse of law. Even if the involvement of the Luxembourgish company was just a device, the steps taken came within the ambit of the SE Regulation. The requirements of the SE Regulation had been followed. Therefore, there was no reason to deny the legality of the SE's creation. It was not an abuse of law to take advantage of the EU right to freedom of establishment.

Impact of Brexit

Brexit was specifically mentioned as a factor behind the Liberty restructuring.

We have observed an increased number of cross-border mergers featuring UK and EEA companies. It is clear from a number of these that the restructuring is part of the group's Brexit-planning.

The Easynet and Liberty decisions are helpful for those contemplating restructuring using either the cross-border merger Regulations or the SE Regulation. However, it is not currently clear to what extent or for how long these regimes will remain available to UK companies post Brexit and much will depend on what deal, if any, is negotiated for the UK's future relationship with the EU.

How can we help?

If you require any advice on the restructuring of companies, whether or not motivated by Brexit considerations, please get in touch.

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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