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US style mergers under English law a framework for Australian companies

New procedure brings 'US' style mergers to Europe 

April 2011

Background

Last year Greencore Group plc, an Irish company, announced a proposed merger with Northern Foods plc, an English company, both of which operated in the food sector.  Greencore recently announced that the merger was not proceeding as it was unable to make a better offer as a result of a competing bid that was approved by Northern.  What was interesting about this transaction was that it was the first public transaction in the UK market which sought to take advantage of the “merger by absorption” option pursuant to the new framework established under The Companies (Cross-Border Mergers) Regulations 2007 (“Cross-Border Regulations”) which enacted the European Cross-Border Mergers Directive.

Traditionally, in the United Kingdom (as in Australia), public transactions are usually effected either through a takeover or scheme of arrangement.  The Cross-Border Regulations offers the ability to undertake ‘US’ style mergers, where companies (either public or private) involved in a transaction where one company is registered under the laws of the United Kingdom and the other under the laws of an EEA state can effect a “cross-border merger” by way of a merger by absorption, a merger by absorption of a wholly-owned subsidiary or a merger by formation of a new company.  The process of “absorption”, involves a “transferor company” transferring all its assets and liabilities to a “transferee company”, with the transferor company being automatically dissolved upon completion without the commencement of a formal liquidation process.  Of the three types of mergers, it is likely that Australian companies with European operations, will consider the ability to undertake a merger by absorption of a wholly-owned subsidiary as a possible alternative option when effecting intra-group reorganisations in a private merger and acquisitions context.  It is this type of merger which will form the focus of our discussion.

Procedure

The process can essentially be broken down into two stages:

  1. compliance with pre-merger formalities; and
  2. completion of the merger.

It is important to bear in mind that to the extent any UK company is involved, it will need to comply with the Cross-Border Regulations but the other EEA company will also need to comply with the requirements of its national law.  Those laws should implement the Cross-Borders Mergers Directive but it will always be necessary to involve foreign counsel to ensure compliance with those pre-merger requirements.

The first stage involves the preparation and circulation of draft merger terms (which must include the likely effects of the cross-border merger for employees for each merging company) and a directors’ report (which explains the effect of the merger for members, creditors and employees).  The members of the transferee company (that is, the parent company) must approve the merger by way of a shareholders’ meeting requisitioned by the court.  The voting thresholds are a majority in number of members representing 75% in value of each class of members present and voting.  However, under the Cross-Border Regulations, a creditor or class of creditors can also apply to the court to ask for a creditors’ meeting to be held to approve the draft terms of merger where the same voting thresholds apply as those for members.

In addition to the above, the Cross-Border Mergers Directive protects employee participation rights by requiring that such rules that are in force in the EEA state in which the transferee company will be registered will apply following the merger.  Such participation rights are mandatory in, for example, Germany and Spain but voluntary in the United Kingdom.  The Cross-Border Regulations do however require a UK transferee company to put in special participation arrangements if the UK merging company has a proportion of employee representatives on its board or the company has, in the six months before the publication of the draft merger terms, an average number of employees that is in excess of 500 employees and has a system of employee participation.  In such cases, the merging companies must adopt the standard rules of employee participation or establish a special negotiating body for the purposes of negotiating with such a body the participation agreement.

Once these procedural steps are completed, the UK company must apply to court to obtain a pre-merger certificate confirming that pre-merger formalities have been satisfied. The other EEA company will need to do the same in its jurisdiction. 

The second stage of the process involves, if the transferee company is a UK company, the court approving the terms of the merger.

Some difficulties for effecting the merger

There are three procedural difficulties for effecting a merger by absorption of a wholly-owned subsidiary:

  1. the possible involvement of creditors means that there may be uncertainty as to the outcome of the proposed merger if the court requisitions a creditors’ meeting or alternatively forms the view that, in order to grant a pre-merger certificate, it has a discretion to refuse if the creditors have been unfairly prejudiced.  In order to address this uncertainty and avoid wasted transaction costs, it is likely that in practice, discussions with creditors beforehand will need to be had to gauge their views on the merits of the merger and such evidence may need to be presented to the court;
  2. the timing for the implementation of the steps takes longer as there are prescribed waiting periods with respect to the lodgment and inspection of the transaction documents, for example, the draft merger terms and court order summoning the shareholder meetings must be lodged with the Registrar at Companies House at least 2 months before the first meeting of members; and
  3. the Cross-Border Regulations are unclear as to how any modification of the draft merger terms can be effected, even in the case of minor amendments, and thus there is a risk that such changes may result in the recommencement of the process.

Outcome

The ability to effect a ‘US’ style merger under English law by way of absorption of a wholly owned subsidiary is to be welcomed as it offers Australian groups with European subsidiaries another tool for effecting intra-group reorganisations.  This will need to be balanced against the fact that such mergers are generally untested in the UK market, the additional timing and procedural complexities of the process, the savings associated with avoiding formal insolvency proceedings and the taxation treatment of the automatic transfers upon dissolution of the transferor company.

Author(s)

  • Jonathon Wood
    Senior Associate (Admitted in New South Wales) | London
    T: +44 20 7496 1724
    M: +44 7769 682 623
    Email
 

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