Simon Little August 2 2017 Cross-border mergers involving UK companies: recent case law Davis Polk & Wardwell LLP | Corporate Finance/M&A - United Kingdom Simon Little Corporate Finance/M&A IntroductionItau BBA InternationalEasynet Global ServicesPortman InsuranceCable & Wireless CommunicationsCommentIntroductionThe use of cross-border mergers by English companies has arguably exceeded expectations since the EU Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC) was implemented in the United Kingdom by the Companies (Cross-Border Mergers) Regulations 2007 (as amended) in December 2007. The procedure has proven to be a popular means of reorganising European group structures and has been occasionally used in arm's-length cross-border transactions, including Liberty Global's takeover of Cable & Wireless Communications and the combination of Technip and FMC Technologies. However, recent transactions have tested the boundaries of the sorts of structure that may be permitted under the regulations, which could reduce the popularity of the procedure.Itau BBA InternationalIn the cross-border merger of Itau BBA International Limited, the High Court noted that there is no suggestion in the directive or the regulations that an existing company in a merger by absorption is required to satisfy any pre-conditions as to its size, capitalisation, trading history or economic substance, and there is no requirement that the participating company should not have been formed for the purposes of, or in connection with, the proposed merger. Accordingly, the regulations would be expected to be available where the specified cross-border criterion is satisfied – that there is at least one limited liability company incorporated in the United Kingdom and at least another incorporated in a member state of the European Economic Area.Easynet Global ServicesHowever, the recent High Court decision in Easynet Global Services Limited rejected the application of the regulations on the basis of the cross-border criterion alone. The proposed transaction concerned the merger into Easynet Global Services Limited of all the English incorporated companies in the group structure and one dormant, non-trading Dutch company without appreciable assets (Easynet Dutchco). Despite satisfying the regulations' cross-border criterion, the High Court regarded the inclusion of Easynet Dutchco as an impermissible device because its purpose was only to bring the merger of English companies within the scope of the regulations. Although the cross-border merger procedure was more favourable than the alternatives under different legislation and would not detrimentally affect employees or creditors, the court was not persuaded that purely commercial objectives justified the application of the regulations.The court thought that for the regulations to be available, a substantive cross-border element must exist. This was not satisfied by the participation of Easynet Dutchco, as it was regarded by the court as having only a trivial effect on the transaction as a result of its modest intragroup receivables of approximately €17,000. While acknowledging that what the court was advocating required an evaluation of the substance of transactions on a case-by-case basis, the court did not regard this as being problematic in practice. However, no guidance was provided as to how this standard should be applied, which could present difficulties in concluding whether a particular transaction, in the court's view, is something that the regulations and the directive were enacted to facilitate.Since the directive and regulations specify only that the cross-border criterion is satisfied for a transaction to qualify, the extent to which Easynet might frustrate the use of the regulations is uncertain. Two decisions that have considered Easynet provide some comfort as to the circumstances in which the regulations will be available.Portman Insurance In Portman Insurance Plc a merger was proposed between an English company and its wholly owned dormant, non-trading French subsidiary (Portman SA) and the simultaneous formation of a European company pursuant to the EU Regulation on the Statute for a European Company. All participants in the proposed transaction were members of the AXA Insurance Group with the purpose of rationalising the European group structure. The issue before the court was whether an application for confirmation that the requisite procedural steps required by the regulation had been satisfied should be refused in light of Easynet on the basis that one of the participants in the proposed merger was a shell company.While Easynet and Portman were pursuing procedures under different legislation, the court in Portman would have been bound by Easynet if a similar device was being relied upon, as was concluded in Easynet. However, the facts before the court in Portman were considered to be distinguishable from those in Easynet; the issue underlying Easynet was that the transaction in question was not properly regarded as truly cross-border, because Easynet Dutchco was merely a device to exploit the regulations. By comparison, while Portman SA was dormant, it was not used as a ruse to achieve a merger that was designed principally for other companies; the merger was being effected to create a European company as part of a wider reorganisation of the AXA Insurance Group.Cable & Wireless CommunicationsIn Cable & Wireless Communications Ltd (C&W) the Easynet ruling was considered to mean (for the regulations to apply) that a cross-border element must exist which cannot arise solely by virtue of a device whose only purpose is to cause a domestic arrangement to fall within the scope of the regulations. On that basis, the cross-border element was satisfied in respect of a merger in which an English company (C&W) and a Dutch company (Mergerco BV) were to merge into another English company (Mergerco Ltd), despite Mergerco BV not having appreciable assets and neither Mergerco BV nor Mergerco Ltd having substantial trading histories. The court was satisfied that a suitable cross-border element existed since the merger was a step in the takeover of C&W, the inclusion of which was to result in more favourable US tax treatment for those shareholders of C&W subject to US tax.CommentThe facts before the court in Portman and Cable & Wireless Communications illustrate circumstances in which the participation of a non-trading entity without appreciable assets will not preclude completion of a cross-border procedure. However, in each case, the use of the cross-border procedure could be framed as a step in a wider transaction. Neither decision addressed the importance of the participation of a dormant company to Easynet, or how Easynet may apply to a group reorganisation that did not involve any steps beyond completion of a cross-border merger under the directive and the regulations.Leave to appeal has been granted in Easynet which may clarify the scope of the cross-border element contemplated in the first-instance judgment. Until then there may be uncertainty as to the ability to complete a cross-border merger where, for example, the sole purpose is to reorganise a group structure so as to reduce ongoing administrative expenses. Further, it may be suitable to consider completing domestic procedures before commencing a cross-border merger as a second step to underscore that there is a necessary cross-border element to the proposed transaction.For further information on this topic please contact Simon J Little at Davis Polk & Wardwell LLP by telephone (+44 20 7418 1300) or email ([email protected]). The Davis Polk & Wardwell LLP website can be accessed at www.davispolk.com.