Court of Appeal overturns decision in Easynet cross-border case (Easynet Global Services Ltd)

Corporate analysis: The Court of Appeal has considered whether a UK company could effect a merger pursuant to the Cross-Border Merger Regulations 2007 where the only non-UK EEA company involved in the transaction was a dormant entity. Overturning the Companies Court’s earlier decision, the Court of Appeal held that the transaction fell within the scope of the Regulations.

Original news

Easynet Global Services Ltd v Secretary of State for Business, Energy & Industrial Strategy [2018] EWCA Civ 10

The Court of Appeal considered whether a UK company could effect a merger pursuant to the Cross-Border Merger Regulations 2007, SI 2007/2974 as amended by SI 2008/583 and SI 2011/1606 (the Regulations) where the only non-UK EEA company involved in the transaction was a dormant entity. Overturning the Companies Court’s earlier decision, the Court of Appeal held that the transaction fell within the scope of the Regulations.

What was the background to the case?

In 2016 Easynet Global Services Ltd (Easynet) applied to the Companies Court for permission under the Regulations to convene a meeting of its sole shareholder. This was intended to be the first step in a series of procedural steps under the Regulations whereby a number of companies (all of which were part of the same group) would be merged in to Easynet.

Only one of the companies involved in the proposed merger, a Dutch subsidiary (BV), was registered in a non-UK EEA state. This company was dormant, had never traded and had no appreciable assets.

The Companies Court interpreted the Directive (as defined below) and the Regulations in a purposive way and decided that, since BV had no substance and was only included in the merger proposal in order to bring it within the scope of the Directive and the Regulations, the proposed merger did not fall within the scope of the Directive and the Regulations. In reality it was not a cross-border merger at all. The court therefore had no jurisdiction to sanction the merger arrangements. In addition, even if the proposed merger did come within the scope of the Directive and the Regulations, this was purely as a result of the device of including BV and the court would be entitled to exercise its discretion to refuse to sanction the merger.

Easynet was granted permission to appeal and the Secretary of State for Business, Energy and Industrial Strategy was invited by the Court of Appeal to make submissions on the issues of EU law raised by the appeal.

For further details on the Companies Court decision, see News Analysis: Easynet caught out by purposive interpretation of Cross-Border Merger Regulations (Re Easynet Global Services Ltd).

When can the Regulations be used to effect a merger?

The procedure under the Regulations is discussed in detail in our Practice Note: Cross border merger regulations. However, in summary, the Regulations can be used where there is a cross-border element to a merger transaction, ie, where there is a merger between:

  • a UK-incorporated company, and
  • a company registered in another EEA state

The Regulations implemented Directive 2005/56/EC on Cross-Border Mergers of Limited Liability Companies (Directive).

What did the Court of Appeal decide?

Allowing the appeal, the Court of Appeal found that the proposed merger did qualify as a cross-border merger falling within the scope of the Directive and the Regulations. In reaching this decision, the court made the following comments:

  • one of the fundamental freedoms under EU law was the right of freedom of establishment in any Member State
  • there was nothing in the Directive to suggest that it was intended to limit this right, other than provisions in the Directive intended to protect the interests of members, creditors, employees and persons dealing with companies involved in cross-border mergers
  • the right of freedom of establishment would be materially restricted if the UK impeded or prohibited a company in another Member State (here, BV) from participating in a cross-border merger so as to become absorbed into a UK company
  • the right would also be materially restricted if the UK regime made it more difficult to proceed with a cross-border merger where it was proposed to include a foreign subsidiary of a UK company in another Member State which had operations which were small in scale or which was dormant, as compared with a merger involving a more substantial foreign subsidiary
  • the principle of legal certainty supported giving the provisions of the Directive a straightforward interpretation according to their natural meaning
  • the proposed merger did not offend against any principles of abuse of law or EU law rights

Although regulation 16 of the Regulations conferred a discretion on the English courts whether to approve the cross-border merger, this discretion was to be exercised in a manner compatible with rights under EU law. On the information currently available to it, the Court of Appeal saw no grounds for withholding its approval.

What are the implications for cross-border mergers?

If the cross-border regime under the Regulations had not been available, then Easynet’s alternatives would have been a scheme of reconstruction under section 900 of the Companies Act 2006 or a scheme of reconstruction under section 110 of the Insolvency Act 1986. The cross-border regime had two key advantages over these structures:

  • under the Regulations the court could sanction transfers of contracts with third parties from the transferor companies to the company into which they were to be merged (if the transaction was structured as a section 900 scheme, this would only be possible by a deed of novation which would require the consent of the third parties)
  • a section 110 scheme would have tax disadvantages as compared with a cross-border merger under the Regulations and might also have reputational disadvantages for the companies involved, since suggestions of insolvency in relation to a company could be damaging

The decision to overturn the Companies Court’s judgement widens the scope of the cross-border regime under the Regulations. It will be interesting to see whether more international groups take advantage when carrying out group reorganisations.

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