Court of Appeal clarifies scope of cross-border mergers regulations

29 / 01 / 2018

In the recent case of Easynet Global Services Ltd v Secretary of State for Business, Energy & Industrial Strategy, one of its first decisions of this year, the Court of Appeal overturned the High Court decision, holding that the proposed merger of several UK companies and one non-UK EEA company into a UK company qualifies as a cross-border merger.

The proposed merger involved a number of UK companies and a dormant company registered in the Netherlands which had never traded and had no appreciable assets, no relevant liabilities, employees or other obligations (the Dutch company) merging with the appellant, Easynet Global Services Ltd. The only purpose of including the Dutch company in the merger proposal was to make it into a cross-border merger within the scope of the Cross-Border Mergers Directive 2005/56/EC (now consolidated into Directive (EU) 2017/1132) (the Directive). The Directive is implemented in domestic law by the Companies (Cross-Border Mergers) Regulations 2007 (the Regulations).

The High Court in first instance interpreted the Directive and the Regulations in a purposive way, holding that, since the Dutch company had no substance and was only included in the merger proposal in order to engage the Directive and the Regulations, the proposed merger did not fall within the scope of the Directive and the Regulations. It held further that, even if the proposed merger did come within the scope of the Directive and the Regulations, the court would refuse to sanction the merger because this would be “purely as a result of the device of including” the Dutch company.

The Court of Appeal disagreed and allowed the appeal.

Is the proposed merger within the scope of the Directive?

The legal context for the decision of the Court of Appeal is protecting the fundamental right of freedom of establishment. Participation in cross-border mergers is a mode of exercise of the right of freedom of establishment and it is the Directive’s stated objective to facilitate cross-border mergers.

The Court emphasises that any restriction on the right of freedom of establishment could only arise from the objectives of the Directive to protect the interests of members and others such as creditors, employees and persons dealing with the companies involved in a cross-border merger. Were the UK to make it more difficult to proceed with a cross-border merger where the merger proposal included a subsidiary of a UK company established in another Member State which “had operations which were small in scale or which was dormant”, this would constitute a material restriction on the right of freedom of establishment. No such restriction has been stipulated in the Directive or the Regulations.

The Court recognises in particular that cross-border mergers are often undertaken by corporate groups so as to achieve costs savings and to minimise tax liabilities. In such cases, the principle of legal certainty would require a straightforward (rather than purposive) interpretation of the Directive’s provisions.

Based on the ordinary meaning of the words used in the relevant provisions, the Court therefore holds that the proposed cross-border merger involving the Dutch company fell within the scope of the Directive and within the definition of “cross-border merger” stated therein. As the Regulations must be interpreted in line with the Directive, the merger also came within the scope of the Regulations.

Does the proposed merger constitute an abuse of law?

The second question before the Court is whether the inclusion of the Dutch company purely in order to take advantage of the cross-border merger procedure of the Directive offends against the principle of abuse of law.

The Court of Appeal does not consider that the inclusion of the Dutch company contravenes the purpose of the Directive. Both sets of rights involved in this case – the right of freedom of establishment and the right of participating in cross-border mergers – have very wide ambits, and the objective of the Directive is, as mentioned above, to facilitate cross-border mergers, for whatever purpose.  Accordingly, the Court holds that the proposed merger does not involve an abuse of law.

Comment

The more cumbersome, expensive or restrictive domestic alternatives to the cross-border regime of the Regulations in this case would have been:

  1. a scheme of reconstruction under section 900 of the Companies Act 2006 which Easynet did not want to use because of difficulties in relation to transferring contracts from the transferor companies to the transferee company, and
  2. a scheme of reconstruction under section 110 of the Insolvency Act 1986 which would have had tax and reputation disadvantages as compared with the cross-border merger.

This decision will be welcome by international and UK corporate groups operating across Europe and considering group reorganisations as it clarifies that the application of the cross-border regime of the Directive and the Regulations is more widely available.