On 4 October 2018, Chief ICC Judge Briggs issued a Business and Property Courts Practice Note reminding practitioners of the need to produce evidence addressing the impact of a proposed cross-border merger on the creditors and employees of a UK transferor company in relation to applications: (a) for permission to convene meetings of members and/or creditors of a UK merging company under Regulation 11 Companies (Cross-border Mergers) Regulations 2007 (CBMR); and (b) for a pre-merger certificate pursuant to regulation 6 CBMR (see FC Feature 4 October 2018).
As explained in Cross-border mergers, Q&A here, there has been judicial debate as to the proper role of the ICC Judges when considering whether to provide apre-merger certificate. In practice, ICC Judges have approached applications on the basis that they have a discretion to consider, at least, whether the merging company should have sought permission to convene a creditors’ meeting (or meetings) to consider the impact of the merger on the creditors.
Until recently (and in common with the approach taken by High Court judges at sanction stage under regulation 16 CBMR: see Cross-border mergers, Q&Ahere), ICC Judges have confined their investigation to questions of solvency. Broadly speaking, where it was clear that the merged company would be solvent post-merger, no creditors’ meeting has been called. Where the merged company would be insolvent (or of doubtful solvency), merging companies have generally put in place parent company support (or some other creditor protection measure) to avoid the need to convene creditor meeting(s).
The looming exit of the UK from the European Union has seen an increase in thenumber of cross-border merger applications, as well as applications under Part VII Financial Services and Markets Act 2000 (see Business transfer schemes under Part VII FSMA 2000) and the European Public Limited-Liability Company Regulations 2004 (see European Companies (SEs)). The court has therefore been considering what, if any, impact Brexit (in particular, a ‘no deal’ Brexit) might have. In recent applications the court has questioned whether Brexit gives rise to specific, free-standing issues. In particular, the court has been concerned as to the potential adverse impact on employees or creditors of a UK merging company in circumstances where, post-merger, the surviving (transferee) company might not have any ongoing link with the UK and/or where there might be questions as to the enforceability of judgments obtained from UK courts or tribunals.
The practice note makes it clear that these issues will have to be addressed in the evidence produced to the court in more detail and at an earlier stage than was previously the case. The court will now consider the potential impact on creditors and employees at the application for permission to convene (if such an application is made: see Cross-border mergers, Q&A here), as well as at theapplication for a pre-merger certificate.
The practice note is useful in identifying various types of creditors that might not appear obvious to merging companies, including their prospective and contingent creditors, policyholders and those with pension rights (particularly if the scheme is a defined benefits scheme). For more information see Cross-border mergers, Q&A here.
The practice note requires the evidence to deal with the position of creditors of the UK merging company, the effect of the merger on them (including any issues arising from Brexit) and any proposals to protect their interests. Beyond that, it is difficult to give hard and fast guidance as to what the evidence will need to address, as each case will depend on the merging companies’ own circumstances. However, it is likely that the court will be less concerned with transactions where the merged company will be significantly solvent post-merger and retain continuing links with the UK, than a company where the solvency position is not clear and the company is exiting the UK completely (particularly where it has long-term unsecured liabilities or may make significant redundancies post-merger).
While the practice note is not directly relevant to applications in relation to inbound mergers (where the UK merging company is the transferee and theissues are less likely to arise), the court is likely to require evidence as to thecreditor approach at the permission to convene application (if relevant) as well as at the pre-merger certificate stage, so as to maintain consistency of practice.
FC Q&A are being updated to reflect this practice note.