Vol 14 (2017) - Issue 2

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Will Brexit Make Reverse Cross-border Mergers a Popular Choice for Future Proofing?

Reverse cross-border mergers could become a popular device for UK companies seeking to maintain and preserve 'passporting' or other EU rights after Brexit, but significant questions remain about how favourable this would be in reality.

Background
The mechanism of a reverse cross-border merger (in this context, where a UK parent company merges with their continental European subsidiary) has not historically been permitted under English law. Indeed cross-border mergers altogether were not an established concept under English law. However the provisions of an EU directive implemented in the UK in 2007 changed that position giving UK corporate groups that option.
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 (the 'UK Regulation') (SI 2007/2974) as amended.
The idea behind the EU Directive was to create a pan-EU system for cross-border mergers, allowing companies to easily merge across EU borders, without the associated administrative burden. The advantage of the Directive designed system is that transferor companies are dissolved without having to undergo liquidation proceedings.
Further, consent provisions in customer and supplier contracts may not be triggered as all assets and liabilities are transferred across automatically and the transferee company becomes party to the contract as if they had been the original party from the beginning. Employment contracts also transfer across, though cross-border mechanisms cannot be used as a way to undermine employee participation schemes as these too will transfer to the new entity or will have to be settled beforehand.
Under the UK implementing Regulations, there are three separate mechanisms that are permitted:
1. One company absorbing another unrelated company;
2. One company absorbing another company within a corporate group (with lesser requirements than above); and
3. Two (or more) companies merging into a newly formed entity

Recently EU cross-border mergers have become a significant consideration when planning future European corporate reorganisations especially on account of the possible implications of Brexit. Prior to this there was limited appetite in the UK for this type of corporate reorganisation. In practice the majority of UK cross-border mergers have been intragroup, rather than have being used in takeovers. For instance, in some corporate groups, 10 or more subsidiaries have been rolled into a single EU entity in the EU country of choice. This does not mean that anything physically has to move across borders, but rather just the structure of the group companies changes from a number of foreign subsidiaries to instead foreign offices of the same corporate entity. Unfortunately for those companies who hoped for a quick same day mechanism to make this happen, this is not the case. Under the UK Regulation for instance, the process takes several months with a court hearing and public advertisement required.

Formenta Limited and Newco Immobiliare S.R.L.
On 23 January 2017, a UK parent company named Formenta Limited, was given permission to be absorbed by its European based Italian subsidiary, Newco Immobiliare S.R.L. As it was an intra-group merger, it was subject to lesser requirements than if the companies had been unrelated. However, what made this instance significant was the fact the High Court authorised, for the first time in its history, a 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. Previously the UK Regulations had only been interpreted to mean a subsidiary could be absorbed by its parent, rather than the ‘reverse’ situation we saw here in the Formenta case.