In this climate, many businesses are taking advantage of the opportunity to merge their businesses to streamline and consolidate their companies.

To help some of the companies that are considering these mergers, European regulations were introduced to establish a framework within which they can work.

In this article Corporate Partner Rishi Malliwal discusses the key aspects of the regulations, and explains how understanding them can help lighten the load of a successful merger.

Merging across borders

SGH Martineau recently acted for a German-based company with a subsidiary in the UK, looking to streamline its existing businesses into a single international entity.

The firm advised on the implementation of the Companies (Cross-Border Mergers) Regulations 2007; a process that allowed the group to reorganise its European assets more efficiently.

Merger Regulations are extremely important for European companies considering a restructure of their corporate group, in order to maximise profitability.

Regulatory overview

The Companies (Cross-Border Mergers) Regulations 2007 enable UK businesses to merge with companies incorporated in another EU Member State with minimal regulatory and procedural burden. Compared to conventional methods of merging, these regulations offer significant advantages:

  • The faster and more efficient transfer of assets and liabilities from the transferor company to the transferee company.
  • Employees are generally also transferred automatically to the transferee company.
  • The transferor company automatically dissolves without the need to place the company into liquidation.
  • Group reorganisations will be substantially simpler and enable companies to consolidate businesses on a cross-border basis efficiently and newly acquired companies can be consolidated with existing group operations simply and at low cost.
  • There is no requirement for counterparty consent on the transfer of businesses – meaning that business contracts are automatically transferred to the transferee company and no time is wasted innovating or renegotiating business contracts.

Advantages

  • No liquidation of the transferor company is required therefore additional cost and time savings are made. Given the transferor company automatically dissolves on transfer of its assets and liabilities, there is also no need to negotiate indemnities to be given by parent entities.
  • Creditors are protected because the court has the discretion to order a creditors’ meeting to approve the merger – and transferees are protected once the court sanctions the merger, as the court order is prima facie evidence that all merger formalities have been complied with.
  • Cross-border group companies are able to reorganise even where member companies are located in different jurisdictions, improving cost effectiveness and efficiency by consolidating businesses within a group as well as improving capital efficiencies.
  • All assets and liabilities are transferred automatically from the transferor to the transferee, without the need for counterparty consent. This is particularly useful where the merging businesses involve a large number of counter parties, such as a traditional retail businesses, and eliminates the time intensive process of complying with contractual obligations for assignment and novation of existing agreements.

Beware - employee participation rights!

Any cross-border merger in accordance with the Merger Regulations (or the comparable European rules) must take account of ‘employee participation’ arrangements where such arrangements exist in one or more of the merging companies. While far less common in the UK, these do exist at a statutory level in many parts of Europe including Germany, Austria, the Netherlands and Spain.

Employee participation rights are the rights of employees or their representatives to exercise influence in the affairs of a company by way of rights to elect or appoint members (or to recommend or oppose the appointment of members) of the Company’s supervisory body.

The general rule is that the company resulting from the cross-border merger will be subject to those rules in force in the jurisdiction in which the company will have its registered office – although there are some exceptions.

It would be prudent for any UK company considering a cross-border merger to consider employee participation rights early and to seek expert advice on this area as part of the pre-merger negotiations.