The ability for UK and EU companies to participate in cross-border mergers was expected to end on EU ‘exit day’ (being 31 January 2020 at 11.00pm). But this is no longer the case.
The amended withdrawal agreement provides that EU law continues to apply to and in the UK from exit day during the ‘transition period’. This runs from ‘exit day’ until 11.00pm on 31 December 2020, and is designed to afford a period of continuity following the UK’s withdrawal from the EU while individuals and companies put arrangements in place regarding the new UK-EU relationship.
In a nutshell, UK companies can still undertake cross-border mergers with other EU companies up until the end of 2020.
Why would a company want to do a cross-border merger?
The cross-border merger regime allows two or more companies within the EEA to effectively become one. The ‘transferor’ company/ies cease to exist and all of their assets and liabilities move across to the ‘transferee’ company.
The beauty of such a merger is that it captures all present and future assets and liabilities, whether they are known about or not. Trying to transfer some liabilities through a contractual arrangement can be difficult or impossible to do where they are incapable of transfer or unknown at the time of transfer.
Alternative methods of transferring assets and liabilities to another entity under English law include court-sanctioned reconstructions or amalgamations of companies or schemes of arrangement, but these are usually expensive, time-consuming, and they are not always available.
By contrast, the cross-border merger regime offers a practical mechanism, which both the courts and Companies House are very familiar with.
Cross-border mergers may be used:
- as a reorganisation tool, where companies are looking to consolidate the number of companies within a group (thereby avoiding the need to liquidate companies or have them struck off the register);
- to mitigate the effects of a potential liability by transferring it to another company within a group; and/or
- where EU groups wish to transfer the assets and liabilities of a UK subsidiary to another EEA affiliate in order to end their UK operations as part of their Brexit planning.
Who can use the cross-border merger process in the UK?
The participants in the merger must include at least one UK company and at least one company established in another EEA state. UK companies limited by guarantee without a share capital or which are being wound up cannot participate in a cross-border merger.
How the cross-border merger process operates in the UK
By way of brief summary, there are three types of cross-border merger under the cross-border merger regime applicable to UK companies. These comprise mergers by:
- absorption of a parent (e.g. a merger of a parent company into its subsidiary);
- absorption of a wholly-owned subsidiary (e.g. a merger of a subsidiary into its parent company); and
- formation of a new company.
There are two main procedural stages when undertaking a cross-border merger.
Step 1: obtain pre-merger certificate
Each participating company must obtain a pre-merger certificate from a designated authority responsible for issuing such a certificate in their home jurisdiction. The certificate confirms that they have completed the pre-merger steps. For English companies, it is the High Court that issues such a certificate.
To obtain a pre-merger certificate, each participating English company will prepare (i) its merger terms (summarising the nature and effect of the proposed merger) and (ii) a related directors’ report. They will also file Form CB01 at Companies House giving details about the proposed merger. Depending upon the type of merger, it may also be necessary to convene a shareholder meeting with the order of the court to approve the merger before the court issues a pre-merger certificate.
Different requirements will apply for the participating companies established elsewhere in order for them to obtain a pre-merger certificate from their local authority.
Step 2: application for approval
Once each participating company has obtained a pre-merger certificate, the participating companies make a joint application to the competent authority in the jurisdiction of the transferee company for final approval of the merger. If the transferee company is based in the UK, this application would be made to the High Court.
A straightforward cross-border merger involving, for example, the absorption of an EEA subsidiary into a UK parent company will take at least ten weeks to complete.
The key takeaway is that cross-border mergers remain available to UK companies until the end of this year. They efficiently merge companies within the EEA, without inadvertently leaving any assets or liabilities behind. They also allow for the dissolution of transferor companies without the need for additional applications or processes.
Those interested in pursuing this route should act quickly as the door to complete cross-border mergers for UK companies will be firmly closed as at 11.00pm on 31 December 2020. Stevens & Bolton has a wealth of experience in this area – please contact the author, Matthew Padian, if you would like to discuss it further.