The ambit of the Companies (Cross-border Merger) Regulations 2007 (CBMR 2007) permits a parent company to be merged into its subsidiary. When undertaking a merger of that type, it is important to be aware of the acquisition of own shares involved and accordingly, the possible breach of the capital maintenance provisions of Part 18 CA 2006. Andrew Thornton summarises the issue and the approach taken in the cases to date to address it.
Although the majority of intra-group mergers undertaken pursuant to the CBMR 2007 involve a merger of sister companies or the absorption by a parent of one or more of its subsidiaries, there is a growing body of cases in which parents are merged into their subsidiaries.The most recent example of a ‘downstream’ merger is that of Formenta Ltd into its Italian subsidiary, New Immobiliare Srl (as yet unreported).
Previous examples have included the unreported cases of Re Chartis UK Holdings Limited (No. 620 of 2011) (UK and Ireland); Re MFM Investment Limited (CR-2016-1304) (UK and Italy); Re Tenaris Global Services (UK) Limited (CR-2016-3512) (UK and Netherlands); and Re Aupeo Limited (CR-2016-8026) (UK and Germany).
There is a trap for the unwary when undertaking a downstream merger. Under regulation 17(1)(a) CBMR 2007, one of the consequences of a merger is that ‘the assets and liabilities of the transferor companies are transferred to the transferee company’. Accordingly, where the cross-border merger takes the form of the absorption of a parent company into its subsidiary, the assets transferred will include the shares in the capital of the subsidiary until then held by the parent company.
Part 18 CA 2006 sets out a general prohibition on a company acquiring its own shares, subject to a number of exceptions (ss 658 and 659 CA 2006). Accordingly, a question arises as to whether:
- the effect of a cross-border merger is deemed to override the statutory prohibition in s 658; or
- one of the exceptions in s 659 applies.
Given that regulation 17(1)(a) provides for a transfer of the assets of the transferor company to the transferee, and regulation 2(2)(f) CBMR 2007 makes provision for consideration for the transfer, it is not clear that any of the exceptions in s 659 apply. Nor does it appear that the CBMR 2007 provide a free-standing exception to the rule (at least without clear guidance to the contrary from the court).
Accordingly, to date, transactions involving the merger of a parent company into its UK subsidiary have adopted the approach of undertaking a court approved reduction of capital to take effect immediately prior to the cross-border merger, in order to ensure that the statutory prohibition in s 658 is not breached. The two applications are usually (but not always) listed to be heard together.
Where the transaction involves a merger of a UK parent into an overseas subsidiary, care will need to be taken to ensure that similar issues do not arise under local law.