Easynet caught out by purposive interpretation of Cross-Border Merger Regulations (Re Easynet Global Services Ltd)

Corporate analysis: In this case the High Court 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.

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Re Easynet Global Services Ltd [2016] EWHC 2681 (Ch)

In this case, the High Court 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 (Regulations) where the only non-UK EEA company involved in the transaction was a dormant entity.

What was the background to the case?

This was an application by Easynet Global Services Ltd (Easynet) for permission under the Regulations, reg 11 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 22 companies (all of which were part of the same group) would be merged in to Easynet.

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-Borade Mergers of Limited Liability Companies (Directive).

What was the key issue in the case?

Of all the 22 companies involved in the proposed merger, only one, Interoute Capital Markets BV (BV), was registered in a non-UK EEA state. This company was dormant, had never traded and had no appreciable assets. While BV was not created simply for the purpose of it becoming involved in this transaction, the court felt that its only purpose in the transaction was to bring it within the scope of the Regulations.

What did the court decide?

On a literal interpretation of the rules, the transaction appeared to satisfy the criteria in the Regulations. However, the court felt that the cross-border characteristic which brought the transaction within the letter of the Regulations was the 'device' of including BV within the transaction.

A reorganisation carried out using the Regulations involved a particular procedure and had particular legal effects and consequences both for the companies involved and for third parties. This procedure and these effects and consequences were provided for in the law to achieve a particular purpose. The proposed transaction was not the kind of transaction which the Regulations and the Directive were enacted to facilitate. The Regulations had to be interpreted having regard to the purpose for which they were enacted. Read that way the transaction did not satisfy the jurisdiction requirements of the Regulations.

The court also commented that even if the transaction did satisfy the jurisdiction requirements, the nature of the transaction and the fact that the jurisdiction requirements had been met purely as a result of the device of including BV, was something which the court should take into account in deciding whether to sanction the merger pursuant to reg 16 of the Regulations. Without getting into a debate on the precise scope of the court's discretion under reg 16, it was difficult to see how the court could do anything other than refuse to sanction this merger in these circumstances.

What are the implications for cross-border mergers?

One of the key differences between a merger under the Regulations and a scheme of arrangement under Part 26 of the Companies Act 2006 is the effect on contracts with third parties. By using the Regulations the court can sanction transfers of contracts which would not otherwise be possible under UK law without novation. The court suggested that this might have been a factor in Easynet seeking to bring the merger within the scope of the Regulations.

The decision shows that the courts will look beyond the strict letter of the law and consider whether the transaction is of a kind which the Regulations and Directive was intended to facilitate. Where a proposed merger only satisfies the jurisdiction requirements as a result of the inclusion of a dormant company, the courts will look to see whether this is a 'device' to bring the transaction within the framework of the Regulations.

By Darius Lewington

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