SE may be formed with a dormant shell company (Re Portman Insurance)

In this case the High Court considered a Part 8 claim form for certification under Article 25(2) of Council Regulation (EC) 2157/2001 on the Statute for a European Company (SE), conclusively attesting to the completion of pre-merger acts and formalities.

Original news

Re Portman Insurance plc [2016] EWHC 2994 (Ch)

Certification as an SE should not be refused because one of the merging entities is a non-trading, dormant company and in effect a shell.

In this case the High Court considered a Part 8 claim form for certification under Article 25(2) of Council Regulation (EC) 2157/2001 on the Statute for a European Company (SE) (the SE Regulation), conclusively attesting to the completion of pre-merger acts and formalities.

What was the background to the case?

The case concerns a Part 8 claim form for certification under Article 25(2) of the SE Regulation, which came into effect on 8 October 2001, conclusively attesting to the completion of pre-merger acts and formalities.

An SE will be formed by at least two companies originating in different Member States who will:

  • merge
  • establish a European holding company, or
  • establish a European subsidiary

Alternatively a public limited company may be converted into an SE provided it has had a subsidiary governed by the law of another Member State for at least two years.

Formation must be scrutinised by the court, in two distinct stages. At the first stage the court is concerned to ensure that the procedural requirements are satisfied. The second stage under Article 26 of the SE Regulation will be heard by a High Court Judge who will consider completion of the merger and the formation of the SE including approval of the draft terms of merger, arrangements for employee involvement and any other issues that may arise, for example concerning its effect upon creditors.

This claim concerns a proposed merger by absorption between Portman Insurance plc and Portman SA, its wholly owned subsidiary incorporated in France, and the simultaneous formation of an SE. It is intended that the SE will relocate to France and merge with its parent, Colisee Re SA. These are all companies of the AXA Insurance Group.

What was the key issue in the case?

The issue for the court was whether certification should be refused because Portman SA is a non-trading, dormant company and in effect a shell. It is an issue previously identified from the decision in Re Easynet Global Services Limited [2016] EWHC 2681 (Ch) which was a claim for approval under the Companies (Cross-Border Mergers) Regulations 2007, SI 2007/2974 (the 2007 Regulations) of a merger of 22 companies. Only one of the 22 was an EEA company outside the UK and this particular company was dormant, had never traded and held no appreciable assets. The court in Re Easynet held that 'its only purpose in this transaction is to bring [the merger] within the scope of the Cross-Border Mergers Regulations', and therefore found its inclusion to be 'a device' and decided that 'this proposed transaction is not the kind of transaction which the 2007 Regulations were enacted to facilitate'.

The decision in Re Easynet was based on the point that the 2007 Regulations were only intended to apply when the merger was truly cross-border. They were not intended to apply to a purely domestic merger. The merger before the court was in truth a domestic merger and could not be treated differently simply by using the device of inserting a non-UK, EEA company when in reality it would have no genuine part to play in and was not otherwise required to be part of the merger.

What was the finding of the court in Re Portman Insurance?

Distinguishing Re Easynet, it was noted that the argument for prohibition has to rely upon a purposive construction because there is no express provision within the Articles requiring the companies or (if appropriate) subsidiaries forming the SE to have traded or to be trading. The court concluded that at no stage do the recitals refer to a trading requirement and that the absence of any such express requirement is therefore entirely consistent with the Articles. It is also notable that when the Articles introduce restrictions to the circumstances of merger, for example two year periods in respect of subsidiaries (see paras 2b, 3b and 4 of Article 2), there is no additional reference to active trading. Certification should therefore not be refused because Portman SA is a non-trading, dormant company and in effect a shell.

Relevance to corporate lawyers

The case provides additional clarity on the interpretation of the SE Regulation and the importance of examining the recitals as well as the Articles when considering arguments for and against the certification of formalities.

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