In a recent decision, the High Court for the first time approved a reverse cross-border merger under the Companies (Cross-border Mergers) Regulations 2007.
The Court considered the proposed merger of the UK parent company, Formenta Ltd (Formenta), with its Italian subsidiary, Newco Immobiliare SRL, by way of a reverse cross-border merger under the Companies (Cross-border Mergers) Regulations 2007 (the Regulations) whereby Formenta was absorbed by its subsidiary and decided to permit it. The case is important as a reverse cross-border has so far not been permitted under English law.
The Regulations provide for three ways to effect a cross-border merger:
- merger by absorption;
- merger by formation of a new company; and
- merger by absorption of a wholly-owned subsidiary.
A reverse cross-border merger is a merger by absorption but it is not the subsidiary being absorbed by the parent company but the parent company itself that is merged into and absorbed by its subsidiary.
On a literal reading of the Regulations, they do not provide for such a reverse cross-border merger and the practitioners’ view until this decision has been that it was not possible for a subsidiary to absorb its parent, regardless of the fact that such a structure raised no minority shareholder concerns.
However, in this case the Court seems to have accepted the applicant’s argument that the proposed merger was motivated by commercial reasons, namely the desire to restructure and streamline the group’s administration and operation, and was therefore a group-internal matter.
As this case is a very recent development it remains to be seen whether it becomes established law and can be relied upon. If it does it may become a useful way for companies to restructure in the wake of the UK’s decision to leave the EU. Other obstacles remain, of course, for this structure to be employed successfully in future. It is not sufficient, for instance, for the UK to permit such a reverse cross-border merger; the subsidiary’s country of incorporation must do so as well, as was the case here with regard to Formenta’s Italian subsidiary. Whether this will still be the case with regard to UK companies following Brexit remains to be seen.
For further information please contact Marlies Braun at mbraun@wedlakebell.com.