Reverse cross border mergers could become a popular device for UK companies seeking to maintain and preserve “passporting” or other EU rights.

The mechanism of a reverse cross-border merger (in this context whereby a UK parent company merges with their continental European subsidiary) has not historically been permitted under English law. However the provisions of an EU directive implemented in the UK in 2007 changed that position giving UK company groups that option.

The reverse cross border merger mechanism was designed to avoid the need for company liquidations. The EU Directive on Cross Border Mergers of Limited Liability Companies (2005/56/EC) (“the EU Directive”) provided a way to allow qualifying companies to effect mergers by operation of law. The EU Directive was implemented in the UK by The Companies Cross Border Mergers Regulations 2007 (SI 2007/2974) as amended.

EU cross border mergers have significantly gained in importance in terms of considering the future of European corporate structures over the last few years. However to date there has not been that much appetite in the UK for this type of corporate reorganisation. But Brexit has undoubtedly focused people’s minds.

It was not surprising, therefore, that it would not be too long before the Courts approval was sought for such a reorganisation.

On 23 January 2017 the High Court authorised the first reverse cross border merger by confirming that UK companies can be absorbed by their subsidiaries as they restructure in response to the UK’s decision to leave the EU. In that case a UK parent company “Formenta Limited” was given permission to be absorbed by its European based Italian subsidiary “Newco Immobiliare S.R.L”.

Following the ruling the company’s legal team observed that this type of reverse merger is likely to be the first of many as businesses respond to the legal and commercial uncertainties of Brexit.