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26 July 2017
What is a cross-border merger?
When and why have cross-border mergers been used?
How are cross-border mergers structured?
Who can participate in a cross-border merger?
How is a cross-border merger completed?
What are the consequences of a cross-border merger?
Can a cross-border merger be completed notwithstanding contractual obligations or other restrictions on transfer?
How long does it take to complete a cross-border merger?
A cross-border merger is a transaction involving a true merger of European entities, in which one or more of the participants ceases to exist.
In the United Kingdom, cross-border mergers are governed by the Companies (Cross-Border Mergers) Regulations 2007 (as amended), which implement the EU Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC).
The procedure has been frequently implemented in connection with solvent reorganisations of group structures. Arm's-length cross-border transactions involving UK companies have also incorporated cross-border mergers. For example, Liberty Global's takeover of Cable & Wireless Communications and the combination of Technip and FMC Technologies under TechnipFMC (a UK-incorporated company) both involved cross-border mergers.
The procedure simplifies the reorganisation of a European group structure by:
In the context of an arm's-length transaction, the procedure can facilitate commercial goals relating to the establishment of the statutory jurisdiction of the parent of the post-transaction group.
The regulations permit three types of cross-border merger:
Limited liability companies governed by the laws of member states of the European Economic Area can participate in cross-border mergers. Certain corporate forms therefore fall outside the scope of the directive.
For the regulations to apply, one of the participants must be a 'company' pursuant to the Companies Act (other than a company limited by guarantee without a share capital or a company being wound up) or a limited liability partnership.
Under the regulations, a cross-border merger consists of two stages:
For a UK participant to obtain a pre-merger certificate under the regulations:
All assets and liabilities of the transferor(s) become the assets and liabilities of the surviving transferee by operation of law, resulting in a true merger of the participants.
Employees of a transferor will become employees of the surviving transferee. Employees may be negatively affected by a cross-border merger to the extent that the post-merger employer is financially weaker or the legislative employment rights in the jurisdiction of the transferee provide less protection than in the jurisdiction of the transferor(s).
Creditors of a transferor will become creditors of the surviving transferee. By combining the creditors of the transferor(s) with those of the surviving transferee, there may be rights of security competition over the assets of the enlarged transferee.
In principle, yes. However, completion of a cross-border merger could result in liability for breach of contract if contractual restrictions in respect of a merger exist. For example, if the cross-border merger resulted in a change of control under a finance facility, the failure to obtain consent from the lenders may trigger an event of default, liability for which would be inherited by the surviving transferee. The regulations provide that the surviving transferee must take such actions required by law to perfect the transfer of assets and liabilities of any transferor.
Approximately five months should be allowed for the completion of a cross-border merger. A longer period may be needed if there are large numbers of participants in different jurisdictions, employee consultations are triggered or potential consequences of completion of the cross-border merger could trigger the need to obtain counterparty consent.
As cross-border mergers may cease to be available in the United Kingdom after Brexit, any procedure should be commenced by Summer 2018.
The key milestones of a cross-border merger under the regulations are as follows:
In addition, if the UK participant is the transferee:
For further information on this topic please contact Will Pearce or Simon J Little at Davis Polk & Wardwell LLP by telephone (+44 20 7418 1300) or email (firstname.lastname@example.org or email@example.com). The Davis Polk & Wardwell LLP website can be accessed at www.davispolk.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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