England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES LIST (ChD)

		Royal Courts of Justice Rolls Building, Fetter Lane, London EC4A 1NL
		27 October 2017

MR. JUSTICE SNOWDEN :

Introduction

1. I have before me an application for the approval of the completion of a proposed cross border merger pursuant to Regulation 16 of the Companies (Cross-Border Mergers) Regulations 2007 ("the Regulations").
2. The Regulations give effect in the UK to the provisions of Directive 2005/56/EC on cross-border mergers of limited liability companies ("the 2005 Directive"). Regulation 16(1) provides that the court may approve the completion of a cross-border 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)."

3. The merger in this case is a merger by absorption between GET Business Services Limited, a company incorporated in England and Wales ("GET"), and ICT Business Services GmbH, a company incorporated in Germany ("ICT"). In the terminology of the Regulations, GET is the transferee company and ICT is the transferor company. The principal activities of both GET and ICT are the provision of information and communication technology services. Both companies are wholly owned subsidiaries of MACH Holdings GmbH ("Holdings"), a company registered in Germany.
4. The draft terms of the merger (the "Terms of Merger") were stated in English and German in the same document dated 2 February 2017 and were approved by the sole director of GET and the sole director of ICT. They were then provided to the Registrar of Companies and duly advertised in the London Gazette. They were approved by Holdings on 30 August 2017.
5. The Terms of Merger provide that ICT will transfer its whole business, including all rights and obligations, to GET. When the merger becomes effective, all assets and liabilities transfer by way of universal succession and ICT will be dissolved without liquidation and cease to exist. Holdings will receive 19,820 new shares in GET in exchange for its 25,000 shares in ICT. Neither company has any employees and so no information is provided on the procedures by which any employee participation rights are to be determined.   
6. GET obtained a certificate from Registrar Derrett on 3 October 2017 pursuant to Regulation 6(2) certifying that the pre-merger acts and formalities for the cross-border merger in Regulations 7-10 and 12-15 had been complied with. ICT also obtained an entry on the Commercial Register B of the Offenbach am Main District Court in Germany on 8 August 2017, stating that the requirements of the merger according to German law had been fulfilled. I have received evidence to the effect that such entry amounts to the issue of a pre-merger certificate for the purposes of Article 10.2 of the 2005 Directive under German law.
7. I am therefore satisfied that the requirements of Regulation 16(1) have, at least on the face of it, been complied with. However, when the matter first came on before me on 18 October 2017, I raised two points with Mr. Simon who appears for the merging companies.
8. The first point related to the pre-merger requirement in Regulation 7(2)(e) concerning a statement in the Terms of Merger of the date of the entitlement of shareholders in the transferee company to participate in profits. The second point related to the exercise of my discretion to approve the completion of the merger having regard to its potential effect on creditors of GET and the limited evidence that I then had as to the financial position of ICT.
9. Although the first point was in theory covered by the certificate granted by Registrar Derrett, Mr. Simon accepted that the point had not been drawn to her attention, and hence that I was not prevented from inquiring into it. The second point is a matter into which the English court may properly inquire under Regulation 16: see Diamond Resorts (Europe) Limited [2012] EWHC 3576 (Ch) at paragraphs 7-10 (Sales J).

Article 7

10. Regulation 7 provides in relevant part as follows:

"(1) The directors of the UK merging company must draw up and adopt a draft of the proposed terms of the cross border merger.

(2) The draft must give particulars of at least the following matters –

…

(e) the date from which the holding of shares or other securities in the transferee company will entitle the holders to participate in profits, and any special conditions affecting that entitlement;

(f) the date from which the transactions of the transferor companies are to be treated for accounting purposes as being those of the transferee company;

…

(3) Particulars of the matters referred to in sub-paragraphs (b), (c) and (e) of paragraph (2) may be omitted in the case of a merger by absorption of a wholly-owned subsidiary."

11. The Terms of Merger in this case stated that,

"The date from which the holding of new shares in [GET] will entitle their owners to participate in profits is 1 January 2017. There are no special conditions affecting that entitlement."

1 January 2017 was the day immediately after the date of the last annual accounts of the two companies (31 December 2016).

12. The issue that I raised with Mr. Simon was that in Re iTouch Ltd [2016] EWHC 3448(Ch) Mr Justice Nugee had expressed concern that Regulation 7(2)(e) might not be complied with if the date given in the merger plan for the purposes of Regulation 7(2)(e) was a date that preceded the date upon which the merger was to come into effect pursuant to the order that the court makes under Regulation 16(2). In this case, the date specified, 1 January 2017, obviously pre-dates the date upon which the merger would take effect pursuant to any order that might be made by me.
13. iTouch was a case of a merger by absorption of a wholly-owned subsidiary into its parent, in which the draft terms of merger stated that the merger was intended to take legal effect on 4 April 2016, and yet the matter came before the English court for approval on 9 November 2016. Mr. Justice Nugee stated,

"Although the date in the draft terms can never be absolutely specified because the date on which the merger in fact takes place … must ultimately be a matter for the court, I was concerned that it might be said that the date required to be given by the draft terms of merger by reg.7(2)(e) … was at least a date which at that stage could genuinely be said to be the intended date from which the holding of shares or other securities in the transferee company would entitle the holders to participate in profits, which would be the date on which the consequences of the cross-border merger would take effect, and that therefore it could not be said that that requirement of reg.7(2)(e) had been complied with at the time that the court approval for the pre-merger acts and formalities was sought, if that date was already in the past."

14. It was not necessary on the facts of iTouch for Mr. Justice Nugee to decide any point as to the effect of regulation 7(2)(e), because, as he pointed out, Regulation 7(3) allows the omission of the matters referred to in regulation 7(2)(e) in the case of a merger by absorption of a wholly-owned subsidiary. He therefore held, approving the merger, that because there was no requirement to specify a date under Regulation 7(2)(e), the giving of a date that had already passed did not constitute a failure to comply with regulation 7(2)(e). The date could simply have been omitted in its entirety.
15. Mr. Simon suggested that I might interpret Regulation 7(3) broadly so as to apply the same exemption to the instant case which involves the merger of two wholly owned subsidiaries of the same parent, rather than the merger of a parent and a wholly-owned subsidiary. He submitted that the considerations that would be applicable in both cases would be similar. I do not, however, consider that I can adopt that course. The wording of the exemption in Regulation 7(3) is quite clear and specific and cannot in any sense be interpreted to apply to the merger of two sister companies.
16. I therefore need to consider the point that concerned Mr. Justice Nugee in iTouch. I do so bearing in mind that, as is clear from the report of iTouch, Mr. Justice Nugee did not have the benefit of full argument and did not actually decide the point. In contrast, I have had the assistance of Mr. Simon on the point and the opportunity to research it further over the adjournment.
17. There is, it would seem, very little by way of readily available guidance or commentary on the purpose and meaning of Regulation 7(2)(e). Its origins can, however, be traced all the way back to an almost identically worded provision in Article 5(2)(d) of the Third EEC Directive on mergers of public companies (78/855/EEC). The Third Directive gave effect to Article 54(3)(g) of the EEC Treaty requiring the co-ordination between the member states of safeguards to protect the interests of members and other parties in relation to company mergers.
18. The Third Directive was proposed by the Commission in 1970: see COM(70) 633, Bull Supp 5/70. The Commission noted that the essence of a merger was an agreement between the merging companies, the terms of which were negotiated and then put to the general meetings of the companies. The Commission considered it was sufficient for co-ordination between the member states to be confined to ensuring that the essential terms of the merger were laid down, in good time before a decision by the general meetings, in a special document ("the merger plan") to be made available to the parties involved. The Commission then set out its proposal for uniform rules for the minimum content of that merger plan.
19. As regards what now appears in Regulation 7(2)(e), the Commission stated,

"Practical needs must be considered in the particulars about the date from which the shares allotted by the acquiring company give a right to dividends and from which the transactions of the company acquired are deemed to be effected on behalf of the company acquiring. The current practice in both cases is to make this date coincide with the end of a trading year."

20. I take from that observation that no particular legal limitation or restriction was intended to be placed on the date which might be specified by the merging companies in their agreement. Indeed, I think that it is apparent that the Commission thought that the date required to be specified in the equivalent of both Regulations 7(2)(e) and 7(2)(f) was entirely a matter for agreement between the companies and could, for practical reasons, be a convenient date in the past. That conclusion would be consistent with the fact that the terms of Regulation 7(2)(e) do not set out any express restrictions on the relevant date which might be specified in the merger plan.
21. I also note that the Commission plainly did not think that the specified date needed to be the date upon which the merger was to become effective. Indeed, if the date required to be specified was simply the date upon which the merger would become effective and the new shares issued, I think that Regulation 7(2)(e) would be otiose. Moreover, it would require the parties agreeing a merger plan to engage in the speculative exercise of guessing a future date which might not turn out to be an accurate prediction, and which would serve no useful purpose, since the actual effective date at which the new shares in the transferee company would be allotted would be the date fixed by the court and not by the parties.
22. I therefore do not think that can be the meaning of Regulation 7(2)(e), and accordingly I respectfully do not share the underlying assumption which gave rise to the concerns expressed by Mr. Justice Nugee in iTouch.
23. Instead, it seems to me that the requirement probably stems from the need for the parties to a merger plan to identify and agree their respective entitlements to the profits which will, after the merger becomes effective, comprise the profits of the merged company in which the enlarged body of shareholders will prima facie be entitled to participate as a consequence of the holding of their shares. Those profits will comprise the distributable profits of both the transferee and the transferor companies at the effective date of the merger. The agreement which the Commission appears to have had in mind would include, for example, the setting of an accounting reference date after which, subject to any special conditions, there should be no distributions of profits by the merging companies and after which the transactions of the transferor company would be treated for accounting purposes as the transactions of the transferee company.
24. I think that interpretation is consistent with the Commission's proposal from 1970. It is also consistent with what I understand to be the manner in which at least one other EU member state has given effect to the 2005 Directive. Mr Simon drew to my attention to the current German merger statute, "Umwandlungsgesetz" which (among other things) implements the 2005 Directive. It provides that the merger plan must state the date from which the members of the transferee company have a "right to participate in the profits". Academic commentary on these provisions, found in Beck OnlineKommentar ("BeckOGK"), states that the implementing provisions correspond with the position in relation to German domestic mergers. Those domestic provisions provide that the parties to a merger shall state the date from which members are entitled to share in the "balance sheet profits" of the transferee.
25. The BeckOGK commentary goes on to state that the reason for the domestic German provision is that the date of registration of the transferor shareholders as shareholders in the transferee company is generally not precisely foreseeable, and therefore linking the starting point for the entitlement to profits to the date of entry into the register of members could lead to practical difficulties in profit sharing as between old and new shareholders. The commentary indicates that the German provisions accordingly empower the parties freely to choose the date from which they will share in profits, without imposing upon them any legal requirements.
26. Accordingly, I think that the date to be specified in Regulation 7(2)(e) is essentially a matter for agreement between the merging parties in order to define how the shareholders of the transferee company will share profits after the merger becomes effective. I do not think that Regulation 7(2)(e) contains any implied restriction on the date that can be specified: certainly it does not exclude the possibility of a date being specified that precedes the effective date of the merger.
27. In the instant case, the parties to the merger selected 1 January 2017, being the day immediately following the end of the last accounting period of the two merging companies. As such, I take the view that the Terms of Merger complied with the requirements of Regulation 7(2)(e).

The protection of creditors of GET and ICT

28. When the matter was first before me, I was not satisfied that I had sufficient evidence of the financial health of the merging companies which would allow me to ensure that the creditors of the two companies would not be prejudiced by the proposed merger. In particular, I was troubled that the figures which I had seen showed that although ICT had made a €6.5m profit in 2015, it had made a €6.2m loss in 2016, leaving it with shareholders' equity of only about €396,981 at the end of 2016. I was concerned that if this apparent reversal of fortunes had been attributable to trading and had continued, the company might in fact have been rendered insolvent since the end of 2016 and hence the creditors of GET might be prejudiced by the merger.
29. Mr Simon has since provided me with a helpful further witness statement from Dr. Friedrich Trautwein who is the sole director of GET. Dr. Trautwein's statement explains that the change in ICT's fortunes in 2015 and 2016 relates to a one-off realisation of an underlying investment in 2015 and an increase in contractual obligations to compensate subsidiaries from 2015 to 2016 which have now ceased following the sale of the subsidiaries.
30. ICT's management accounts for the half year ending 30 June 2017 show only a modest operating loss of €41,442, and it has net assets (equity) totalling €305,540 as at 30 June 2017. It has only a very small number of creditors amounting to €3,057. In comparison, the accounts for GET show a very small operating loss in the half year ending 30 June 2017 of £567. GET has fewer assets amounting to £104,993, but significant liabilities amounting to £103,960, leaving modest net assets (equity) of £1,033. If anything, it is clear that the creditors of GET stand to benefit, rather than lose out, from this merger.
31. On the basis of these updated figures I am satisfied that both companies are solvent, and that there is no obvious basis upon which creditors of either company (and in particular GET) could reasonably claim that their position will be materially prejudiced by the merger.

Conclusion

32. I am therefore satisfied that the parties have complied with their pre-merger requirements, including by stipulating the date of 1 January 2017 as the date from which the holding of new shares in GET will entitle their owners to participate in profits of the merged company. I am also satisfied that the creditors of the two companies will not suffer a material detriment as a result of the merger.
33. I shall therefore approve the completion of the cross-border merger.