England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		19/03/2015

Mr Justice Birss:

1. This is an application for an order under Regulation 16 of the Companies (Cross-Border Mergers) Regulations 2007 ("the CBM Regulations) for an order to complete a merger between an Italian company GTECH SpA ("GTECH") and an English company International Game Technology Plc ("IGT Plc"). Currently IGT Plc is a wholly owned subsidiary of GTECH.
2. The merger is part of a much larger corporate transaction. The overall transaction is to merge two separate lottery and gaming businesses. One business is that of GTECH. The other is the business of International Game Technology Inc. ("IGT Inc."), a United States company incorporated in the state of Nevada. Shares in GTECH are currently listed on the Borsa Italia with a market capitalisation of about €3 billion. Shares in IGT Inc. are currently listed on the New York Stock Exchange (NYSE) with a market capitalisation of about $4 billion.
3. The merger is to take place pursuant to a merger agreement signed on 15^th July 2014 and amended on 23^rd September 2014. The overall transaction is in two parts:

i) First IGT Plc is to implement the cross-border merger the subject of this application whereupon shareholders in GTECH will exchange on a one for one basis their shares in GTECH for shares in IGT Plc, save to the extent that withdrawal rights have been exercised.

ii) Second, as soon as the respective systems of law and time zones allow, IGT Inc. will merge under the merger provisions of Nevada law with a subsidiary of IGT Plc on terms that IGT Inc. is the surviving company. The former shareholders of IGT Inc. will receive shares in IGT Plc and a cash payment, possibly of the order of $3.19 billion from IGT Plc.

4. The state of affairs at the end of the whole transaction will be that IGT Plc will be the holding company for a group of companies comprising the businesses of GTECH and IGT Inc. The operating business of GTECH in Italy will be restructured. IGT Plc will be tax resident in the UK but its shares will be listed on the NYSE. It is anticipated that about 79% of IGT Plc's issued share capital will be held by former members of GTECH with about 21% by former members of IGT Inc.
5. Mr Moore informed me that to his knowledge, this was the first occasion in which the English court has had to consider a cross-border merger in a proper mergers and acquisitions (M&A) context rather than as part of an intra-group reorganisation, especially one which spans three jurisdictions. That feature creates complexities regarding the completion mechanics of the overall merger. Particular problems arise because, as part of the overall merger agreement, conditional elements are supposed to endure after the date of the Court makes the order approving the completion of the cross-border merger pursuant to Regulation16(1) of the CBM Regulations. There is also a termination right which endures after the merger which this court is asked to approve has taken effect. The termination right only comes to an end when the entire transaction completes.
6. Although it happens to be the case that in this transaction the conditions in part reflect the trans-Atlantic nature of part of the overall deal, Counsel submitted that it is to be anticipated that proper M&A cross-border mergers within the EEA would also, as a commercial matter, be subject to conditions.
7. I made the order sought. These are my reasons for doing so.

Steps up to today

8. On 2^nd September 2014 the court gave IGT Plc liberty pursuant to Regulation 13 of the CBM Regulations to convene a meeting of its members, i.e. GTECH and its nominee.
9. On 8^th September 2014, on the application of IGT Plc and GTECH the court approved the appointment of Grant Thornton as joint expert under Regulation 9(3) of the CBM Regulations.
10. On 6^th March the relevant competent authority in Italy certified that GTECH had completed properly the pre-merger acts and formalities for the cross-border merger. That certificate was made by a Notary Public, who is the competent authority under Article 10.2 of the Directive as implemented by Legislative Decree No. 130 of May 30, 2008. The Italian pre-merger certificate was issued in English. It includes a copy of a certificate from the Ordinary Court of Rome confirming that there has been no opposition to the merger by creditors of GTECH.
11. On 11^th March 2015 the court made an order under Regulation 6 of the CBM Regulations certifying that IGT Plc had completed properly the pre-merger acts and formalities for the cross-border merger.
12. On 12^th March 2015 the parties signed a confirmation letter agreeing that some of the conditions in the merger agreement had been satisfied or were waived. Also in evidence is a draft of a second confirmation letter which the parties expect to sign on 31^st March 2015 which is intended to confirm that all the then outstanding conditions have been satisfied or waived.
13. The order sought provides that the merger will takes effect at 12.01pm on 7th April 2015. That is more than 21 days from the date of the order (Regulation 16(2)).
14. Subject to the important point considered below, I am satisfied that there is no jurisdictional impediment to the making of the order. All the various matters set out in Regulation 16(1) (a) to (e) have been complied with. There is no relevant employee participation (Reg 16(1)(f)). Moreover, subject again to the point below, I would be satisfied that the discretion arising in Regulation 16 should be exercised in favour of the merger and in that regard I bear in mind the judgment of Sales J in Diamond Resorts (Europe) Ltd [2012] EWHC 3576 (Ch).

Conditions in the order

15. In order to complete the merger the applicants ask the court to make an order which contains conditions. That raises the question whether the court has jurisdiction to do so and, if it does, whether the order should be made in the exercise of the court's discretion.
16. The merger agreement provides for conditions to be satisfied and rights to terminate which survive the making of the order under Regulation 16. The conditions are set out in Article VI of the merger agreement and the termination rights are set out in Article VII.
17. The wording of the conditions is lengthy and they do not need to be set out in full. The conditions deal with competition and regulatory clearances, no injunctions restraining the transaction and no breach of warranties and representations. One of the conditions relates to delisting of the shares in Italy. Borsa Italia has confirmed that upon confirmation of the cross-border merger as being wholly unconditional, they will issue a de-listing notice.
18. The termination rights reflect the conditions. Importantly, one termination right (clause 7.01(j)) gives IGT Inc. the ability to terminate in the event that the conditions have been satisfied but GTECH fails to effect completion at the contracted time. Termination in this way entitles IGT Inc. to receive a large sum (approximately 5% of the market capitalisation of IGT Inc.). Mr Moore submits and I accept that these clauses are all part of the scheme of the merger agreement intended to encourage and ensure that the merger takes place as agreed.
19. The order in the form originally sought was as follows:

IT IS ORDERED pursuant to Regulation 16 of the Companies (Cross-Border Mergers) Regulations 2007 that the completion of the proposed cross-border merger between the Claimants as set out in Schedule 1 hereto be approved for the purposes of Article 11 of Directive 2005/56/EC on cross-border mergers of limited liability companies

AND IT IS ORDERED that the consequences of the merger will take effect as of 12.01 a.m. on 7 April 2015, subject to satisfaction or waiver by that time and date of all conditions set out in Article VI of the merger agreement dated 15 July 2014 entered into between, among others, the Claimants, as amended on 23 September 2014 (the "Merger Agreement") and subject to the Merger Agreement not having been terminated by GTECH S.p.A. or International Game Technology under the terms of the Merger Agreement. Article VI of the Merger Agreement is set out in Schedule 2 hereto

LIBERTY TO APPLY

20. The second paragraph of the order is in a conditional form. Its intended effect is that it will take effect on 7^th April 2015 as long as two conditions are satisfied. The first condition is that all the conditions in Article VI of the merger agreement have been satisfied or waived. The second condition is that the termination rights have not been exercised by that date. The liberty to apply is there to allow the parties to return to court before completion in the event something does go wrong.
21. The right to terminate in clause 7.01(j) will endure beyond 7^th April 2015 until the overall completion of the whole transaction by the filing of documents at the relevant Registry in Nevada. It is envisaged that that will happen within about one day of 7^th April 2015. That enduring effect of clause 7.01(j) does not bear directly on the question of whether the court has jurisdiction to make a conditional order but it does have a bearing on the exercise of the court's discretion, if jurisdiction exists.

Does the court have jurisdiction under Regulation 16 to make an order subject to conditions?

22. The CBM Regulations were enacted to give effect to Directive 2005/56/EC of the European Parliament and the Council of 26^th October 2005 on cross-border mergers of limited liability companies. Regulation 16 of the CBM Regulations provides:

Court approval of cross-border merger

16.—(1) The court may, on the joint application of all the merging companies, make an order approving the completion of the cross-border merger for the purposes of Article 11 of the Directive (scrutiny of completion of merger) if—

(a) the transferee company is a UK company;

(b) an order has been made under regulation 6 (court approval of pre-merger requirements) in relation to each UK merging company;

(c) an order has been made by a competent authority of another EEA State for the purposes of Article 10.2 of the Directive (issue of pre-merger certificate) in relation to each merging company which is an EEA company;

(d) the application is made to the court on a date not more than 6 months after the making of any order referred to in sub-paragraph (b) or (c);

(e) the draft terms of merger approved by every order referred to in sub-paragraphs (b) and (c) are the same; and

(f) where appropriate, any arrangements for employee participation in the transferee company have been determined in accordance with Part 4 of these Regulations (employee participation).

(2) Where the court makes such an order—

(a) it must in the order fix a date on which the consequences of the cross-border merger (see regulation 17) are to have effect; and

(b) that date must be not less than 21 days after the date on which the order is made.

(3) After the consequences of the cross-border merger have taken effect (see regulation 17), an order made under this regulation is conclusive evidence that—

(a) the conditions set out in paragraph (1) have been satisfied; and

(b) the requirements of regulations 7 to 10 and 12 to 15 (pre-merger requirements) have been complied with.

23. Regulation 16(3) is in italics above because with effect from 6^th April 2015, which is the day before the order sought is to take effect, Regulation 16(3) is to be amended by the Companies (Cross-Border Mergers) (Amendment) Regulations 2015 SI 2015/180 and will provide as follows:

(3) After the consequences of the cross-border merger have taken effect (see regulation 17)—

(a) an order made under this regulation is conclusive evidence that—

(i) the conditions set out in paragraph (1) have been satisfied; and

(ii) the requirements of regulations 7 to 10 and 12 to 15 (pre-merger requirements) have been complied with; and

(b) the cross-border merger may not be declared null and void.

24. Counsel submitted that the court does have jurisdiction to make a conditional order. I accept that submission, essentially for four of the reasons Mr Moore gave, which were as follows.
25. First, as a matter of the express terms of Regulation 16 itself, there is nothing in the words used which would appear to restrict the ability of the court to make such an order. That is the case both given the language of Regulation 16 in effect today and following the amendment to Reg 16(3). The amendment refers to the conclusiveness of the order after it has taken effect, not to conditions which bring it into effect.
26. Second, considering that the CBM Regulations have been passed to give effect to the Directive, there is nothing in the language of the Directive which would appear to rule out the ability of proper authority to do such a thing in appropriate circumstances.
27. Third, consideration of Recitals 2 and 3 to the Directive supports the view that a conditional order may be made if they are required in order to give effect to the agreement the parties have reached. These recitals expressly refer to the fact that the purpose of the Directive is to facilitate cross-border mergers and remove obstacles to their implementation. It is not surprising that mergers arising as part of complex international M&A transactions might include conditional elements.
28. Fourth, Recital 4 to the Directive shows that the Directive anticipates that companies will be free to agree on other terms in the cross-border merger beyond the common draft terms which are to form the basis of the approvals by the relevant authorities. There is no restriction on the contents of those other terms.
29. Mr Moore also made a fifth submission in support of this point, as follows. The structure of Regulation 16 provides for a two stage process whereby first the court approves the completion of the merger (Reg 16(1)) and second it must fix a date when the consequences of the merger are to take effect. The date must be at least 21 days after the date of the order. Regulation 17 sets out the consequences which take effect in that later date. It is Regulation 17 which in legal terms gives effect to the merger. The Directive does not set a period of 21 days, that period was set by the UK when it implemented the CBM Regulations. Nevertheless the concept of a two stage process is contemplated by Recital 7 to the Directive (see esp. the last sentence).
30. Mr Moore submitted that the 21 day time lag must have some purpose. He referred to Regulation 19(2), which provides that a copy of the order has to be delivered to registrar of companies within 7 days, and submitted that this was intended to act as notice to the public that the merger was in prospect rather than notice that it had occurred (given its timing). Moreover on any view that 7 day period still left more time before the expiry of the minimum 21 day period. Mr Moore submitted that no purpose other than the ability to satisfy conditions could be suggested for the whole of the 21 day period.
31. I can see that the structure of the UK Regulations provides for a period of at least 21 days between the Court's order and the taking effect of the merger and that this period is one in which conditions could be satisfied, I can see that Recital 7 to the Directive contemplates a difference between the approval and the date on which approval takes effect and I can see that the existence of the 21 day period is not wholly explained by Regulation 19(2). The existence of two stages does allow a conditional order to operate but I am not convinced that I can infer from the existence of this time period that the legislator had in mind that the court's power conferred in Regulation 16 would include power to approve mergers subject to conditions. If that is what the time was for it would have been easy to make that clear. However since I am satisfied that the court has jurisdiction to make such an order for the four other reasons relied on, any doubt I have about this fifth point does not matter.

How should the court's jurisdiction under Regulation 16 to make an order subject to conditions be exercised?

32. Mr Moore submitted that the essential principles can be looked at in the following way. If one starts by asking the question: why might a court not approve of a merger subject to conditions, the reason cannot be based on amour propre. On the contrary the difficulties, if they exist, arise because the court will seek to ensure that shareholders are not forced to accept something substantially different from that which they voted for and because the court will do nothing in vain. The former point can always be addressed when considering the details terms of the merger and the order to be made. The latter point arises because if the conditions are not satisfied, the order made by the court will have been pointless.
33. In a different context (reduction of capital) in Re Ratners Group Plc [1988] BCLC 685 at 688 Harman J said this:

"Counsel wholly accepted that the Court will not do anything in vain and that, if a reduction was applied for, approved by the shareholders but on the evidence was not for any discernible purpose at all but simply an act in vacuum, the court might well say that it would not in its discretion sanction it. …..as a matter of discretion: the court will not act in vain; the matter had not been shown to have any real purpose; if it never was more than a hollow act, of no merit or purpose, and should not be troubling the court or wasting everybody's time; and for that reason the court might exercise its discretion against sanctioning the proposed reduction."

34. There Harman J was expressing the point that the court would not make an order which was futile, in the sense of being a hollow act, without merit or purpose. To illustrate the point further Mr Moore contrasted Re Tucker, ex parte Tucker [1990] Ch.142 and Re Casterbridge Properties Ltd [2004] 1 WLR 602. In Re Tucker, Dillon L.J. refused an order for the public examination of a bankrupt resident in Belgium, because "it is plain to me that the Belgian Court would not compel Mr Tucker to come up for examination and would not punish him if he refused to come or came and would not answer". Without Mr Tucker's co-operation which would not be forthcoming, the order was certain to have no effect. By contrast in Re Casterbridge Properties, where Mr Jeeves claimed the right to refuse to answer questions on certain relevant matters, the order was granted because it was not shown that the examination would serve no useful purpose. There might be successful objection to some or all of the questions, but it was not certain that nothing useful could take place.
35. I accept Mr Moore's submission, illustrated by the above pair of cases, that the correct principle is that unless the Court is satisfied that its order would be futile, conditionality is merely one of the factors which the Court takes into account in exercising its discretion.
36. Mr Moore also submitted that the Court should draw on the very similar jurisdiction under Part 26 of the Companies Act to sanction schemes of arrangement. There are two recent cases dealing with the question of sanctioning schemes subject to conditions. First, in Fiberweb Plc [2013] EWHC 4653 (Ch) Hildyard J had to consider what was the usual practice of the Companies Court relating to sanctioning schemes in circumstances in which the bidder for a company was not prepared to confirm that any conditions to which the offer was subject are either satisfied or waived. In that case the learned judge decided that he would require the bidder to confirm that it did either waive or treat as satisfied the conditions in dispute.
37. Second, in Lombard Medical Technologies Plc, [2014] EWHC 2457 (Ch) Henderson J was asked to sanction a scheme subject to conditions. It was possible on that occasion to review more authorities and consider the matter in more depth than had been possible in Fiberweb. Henderson J decided that there was nothing in Fiberweb which should cause him to refuse to sanction the scheme before him.
38. In reaching that conclusion Henderson J noted that there was nothing in the guidance set out in the well known and frequently cited case Re National Bank Ltd [1966] 1 WLR 819 (Plowman J) which required that there must be certainty about future events before the court should sanction a scheme applying the test relating to the approval of a reasonable and intelligent honest member of the relevant class. He also noted that in previous cases, not cited to Hildyard J, the court had sanctioned schemes in circumstances in which there was uncertainty about future events. He referred to a similar case in Australia and also observed that in Fiberweb itself (paragraph 7) Hildyard J had noted that the court might approve a scheme subject to approval by a foreign court or regulator.
39. Mr Moore referred to a particular passage in the judgment of Henderson J, at paragraph 26 as follows:

"I can see no objection in principle to the Court sanctioning a scheme which is conditional on one or more respects, provided always that the court considers it appropriate to do so in the exercise of its discretion. Examples of the kind of condition which the Court may be willing to sanction, even if they are unsatisfied at the date of the hearing, are outstanding requirements for foreign regulatory approval which there is no reason to suppose will not be granted. Further, the terms of the scheme itself may provide that it will cease to have effect in certain circumstances, for example if the steps contemplated are not taken before a specified long-stop date. By contrast, the court would be most unlikely to sanction a scheme if the outstanding condition was one which in effect conferred on a third party the right to decide whether, or when, the scheme should come into operation, or which enabled the terms of the scheme to be varied in some material respect. The objection then would be that the court was not truly in a position to consider the merits of the scheme, so it could not properly exercise the jurisdiction conferred on it by Parliament to approve the scheme on behalf of all members of the relevant class or classes of shareholders."

40. In my judgment these considerations are equally applicable when the court is considering whether to make an order approving a cross-border merger under Regulation 16 of the CBM Regulations.

The court's discretion in this case

41. An important factor underlying all of this is the point that the merger agreement contains an obligation on all parties to use their reasonable endeavours to complete the merger (clause 5.06). Neither party can freely walk away from this transaction. They are each obliged to use their reasonable endeavours to satisfy the various conditions and, once satisfied, they must close.
42. The various conditions are summarised above. This is not a situation in which a third party has the right to decide whether or when the scheme should come into operation (c.f. the passage quoted above Lombard Medical). Nor is it a case in which the conditional order allows the terms of the scheme to be varied in some material respect.
43. The evidence, consisting of a statement from Mr Declan Harkin, a director of IGT Plc and a statement of Marco Sala, a director of GTECH, shows that I can have a high degree of confidence that the court is not acting in vain. The letter of 12^th March 2015 and the draft letter of 31^st March are clear indications that both sides are confident the transaction as a whole will complete. The evidence also shows that the funds are now available to make the payments to be made to the shareholders of IGT Inc., via an escrow arrangement.
44. If the conditions are not satisfied, the order will not come into effect on 7^th April and the parties will be back in the positions they were in at the start.
45. One inevitable feature of this arrangement is that the termination right under clause 7.01(j) will endure after the merger of IGT Plc and GTECH takes effect. That is unavoidable. Each of the two mergers is a necessary component of this overall transaction. One of them is bound to have to complete before the other. Thus there is a theoretical possibility that the overall process could break down half way through, with GTECH merged into IGT Plc but IGT Inc. not merged into the subsidiary of IGT Plc. That would leave the former shareholders of GTECH with shares in an unlisted UK Plc as the holding company of the GTECH business but not the IGT business.
46. The period between the completion of the two will be very short and I am satisfied the chances of a problem arising such that the right of termination is exercised in that period are vanishingly small, for the following reasons. The termination right can only be exercised by IGT Inc. in highly limited circumstances. All the conditions would have to be satisfied but, notwithstanding the general obligation upon GTECH under Article 5.07 of the merger agreement to complete and notwithstanding that its own shareholders will have been merged into IGT plc, GTECH for some reason would have to decide not to proceed to completion. I cannot imagine why they would do so, especially given the substantial termination payment upon GTECH if it fails to complete. Thus the continued existence of the termination right does not detract from the prospect of the overall transaction being completed, it actually increases that prospect.

Form of the order

47. In the course of the hearing, a question arose about the precise effect of the conditional order drafted in its form above. Although some of the conditions are regulatory approvals which either will or will not have been given by the relevant date, one of the conditions relates to the truthfulness of representations and warranties. What would be the effect of an order drafted this way if, say, a breach of warranty emerged 6 months after the order was made? Clearly the purpose of the order is that whatever else might happen after 7^th April, the merger itself, as an act, is to happen on 7^th April. This would be plain in any case but is made even clearer by the amendment to Regulation 16. Whatever the contractual rights and remedies of the parties might be at a later date, by regulation 16(3), after the date the merger may not be declared null and void.
48. In order to address this question, a different forms of words was proposed as follows:

?AND IT IS ORDERED that the consequences of the merger will take effect as of 12.01 a.m. on 7 April 2015, subject to it being agreed by that time and date that all conditions set out in Article VI of the merger agreement dated 15 July 2014 entered into between, among others, the Claimants, as amended on 23 September 2014 (the "Merger Agreement") have been satisfied or waived and subject to the Merger Agreement not having been terminated by GTECH S.p.A. or International Game Technology under the terms of the Merger Agreement. Articles VI and VII of the Merger Agreement are set out in Schedule 2 hereto

49. The effect of this form of order is that the first condition required to bring it into effect is now triggered by the parties' agreement that the conditions in Article VI have been satisfied or waived. This makes sense in the context of the process of exchange of confirmation letters whereby a first confirmation letter dated 12^th March 2015 has already been exchanged and it is intended that a second confirmation letter will be signed on 31^st March 2015. This form of words deals with the point and ensures that that is a clear temporal element to the satisfaction of the conditions in the order. As long as those conditions are satisfied by the relevant time, the order will take effect. It could not be said to be in conflict with Regulation 16(3).
50. This form of words could be said to have the effect of allowing the parties the right to decide whether the scheme should come into operation and as such be contrary to the principles described by Henderson J in Lombard Medical. Clearly it is true that if the parties cannot agree by 7^th April that the conditions are satisfied or waived, then the order will not take effect. However as a practical matter this form of words does not confer any unwarranted rights on the parties over and above what is inevitable in a complex corporate transaction of this kind. There is already in place an agreed mechanism of confirmation letters to address the satisfaction of the conditions in Article VI. The agreement in its own terms provides that the parties are obliged to use their reasonable endeavours to complete. I will make the order in this latter form.

Conclusion

51. The completion of the cross-border merger between GTECH S.p.A. and International Game Technology Plc is approved.