Re Easynet Global Services Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Sales,Lord Justice Davis,Lord Justice David Richards |
| Judgment Date | 18 January 2018 |
| Neutral Citation | [2018] EWCA Civ 10 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2016/4623 |
| Date | 18 January 2018 |
[2018] EWCA Civ 10
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT (CHANCERY DIVISION)
THE HON. MR JUSTICE BIRSS
IN THE MATTER OF THE COMPANIES (CROSS-BORDER MERGERS) REGULATIONS 2007
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Davis
Lord Justice Sales
and
Lord Justice David Richards
Case No: A3/2016/4623
Stephen Horan and David Scannell (instructed by Bird & Bird LLP) for the Appellant
Katherine Apps (instructed by Government Legal Department) for the Intervener
Hearing date: 28 November 2017
Judgment Approved
This appeal is concerned with the operation of the Companies (Cross-Border Mergers) Regulations 2007 (“the Regulations”) and the Cross-Border Mergers Directive 2005/56/EC of 25 October 2005 (“the 2005 Directive”), which the Regulations implement in domestic law. The appeal is from a judgment of Birss J dated 31 October 2016. Since that judgment, a further Directive has been promulgated which consolidates a range of EU instruments concerned with aspects of company law, including the 2005 Directive, into a single new instrument: Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (codification) (“the 2017 Directive”). However, the 2017 Directive does not change the law in any material respect and the relevant provisions of the 2005 Directive are re-enacted in it. It is convenient to refer in this judgment to the provisions as they appeared in the 2005 Directive.
Under the scheme of the 2005 Directive, where it is proposed that there should be a cross-border merger of companies there is a process involving a review of the merger proposal in relation to each entity participating in it, before the proposal takes effect. These entities comprise both the companies which are to be merged into another company and hence which are to lose their independent corporate personality (“the transferor companies”) and the company into which they are to be merged (“the transferee company”). The interests of the shareholders, creditors and persons contracting with these entities (in particular, their employees, whose rights are accorded special treatment under the 2005 Directive) will be affected by a merger and assurance is required that such interests will not be detrimentally affected to a disproportionate degree by implementation of the merger. The 2005 Directive requires there to be a review and certification of the merger proposal at the pre-merger stage in respect of each company involved by the “competent authority” in the Member State in which that company is incorporated and then that there is a final approval of the merger in the Member State of the transferee company.
Under the 2005 Directive, the designation of the competent authority is left to the discretion of each Member State and it may be a court, a notary or any other competent authority appointed by the Member State concerned. In several Member States the designated competent authority is a notary or an administrative body. In the United Kingdom and some other Member States, it is a court.
The present case concerns an application by the appellant, as the transferee company in a proposed merger, for permission under regulation 11 of the Regulations to convene a meeting of its sole shareholder. At the time of the application to the judge, this was intended to be the first in a series of procedural steps under the 2005 Directive and the Regulations whereby 22 companies out of a larger number of companies in the same group would be merged into the appellant.
However, all of the relevant companies were UK companies apart from one, which was registered in the Netherlands (“the Dutch company”). The Dutch company was dormant, had never traded and had no appreciable assets (only some modest inter-group receivables of about €17,000) and no relevant liabilities, employees or other obligations. The only purpose of including the Dutch company in the merger proposal was to make it into a cross-border merger proposal in relation to which the 2005 Directive would apply.
The regime under the 2005 Directive was considered to be more attractive than other more cumbersome, expensive or restrictive domestic procedures which might have been employed to achieve a merger of the participating UK companies into the appellant, whereby the appellant would come to hold all their assets and liabilities. Those domestic procedures, as identified by the judge, were a scheme of reconstruction under section 900 of the Companies Act 2006 and a scheme of reconstruction under section 110 of the Insolvency Act 1986.
The latter option would have tax disadvantages as compared with a cross-border merger under the 2005 Directive and the Regulations and might also have reputational disadvantages for the companies involved, since suggestions of insolvency in relation to a company can be damaging. The appellant and its associated companies did not wish to use the first option because of difficulties in relation to transferring contracts of transferor companies to the appellant as the transferee company, as explained by Henderson J in Re TSB Nuclear Energy Investment UK Ltd [2014] EWHC 1272 (Ch) at [11]–[12]; and see Nokes v Doncaster Amalgamated Collieries [1940] AC 1014. By contrast, under the procedure in the 2005 Directive and the Regulations the court can sanction transfers of contracts from transferor companies to the transferee company by a form of statutory novation.
It is usual for an application to convene a meeting of shareholders to be made to a Registrar of the Companies Court. However, the practice has grown up to make an application under regulation 11 of the Regulations to a judge in the Companies Court, where it is thought that novel or substantial issues may arise either at that stage or on a subsequent application under regulation 16 for an order approving the completion of the merger. This procedure potentially allows any serious problems with a cross-border merger proposal to be flushed out at an early stage, before other expensive parts of the procedure are embarked upon.
In this case, since the Dutch company had no substance and was only included in the merger proposal in order to engage the 2005 Directive and the Regulations, the judge found that the proposed merger did not fall within the scope of the Directive and the Regulations, interpreting them in a purposive way: para. [32] (“… it is not, in reality, a cross-border merger at all”). The court therefore had no jurisdiction to sanction the merger arrangements. In the alternative, if the proposed merger did come within the scope of the 2005 Directive and the Regulations, he indicated that since this was so “purely as a result of the device of including [the Dutch company]”, the court would refuse to exercise its discretionary power to give its sanction for the merger to take effect: para. [33].
The judge granted permission to appeal. When this court reviewed the papers for the appeal, we considered that it would be helpful to have more substantial submissions on the issues of EU law raised by the appeal and the benefit of submissions from the Secretary of State for Business, Energy and Industrial Strategy, as the Minister with responsibility for the Regulations and for ensuring that the UK's obligations under the 2005 Directive and the 2017 Directive are properly implemented in domestic law. We therefore adjourned the hearing of the appeal, giving directions for further submissions from the appellants and inviting the Secretary of State to appear and make representations as an interested party. The Secretary of State appeared by counsel at the hearing of the appeal to make submissions in support of allowing the appeal.
By the time of the appeal, the precise details of the proposed merger had changed. Fewer UK companies are now involved. However, the basic feature of the proposal which created the difficulty at first instance, namely the inclusion of the dormant Dutch company which has no economic substance in order to bring the proposal within the scope of the 2005 Directive and the Regulations, remains in place. The issue of principle for us remains the same as it was before the judge.
On the appeal, the appellant submits that the proposed merger arrangements, by including the Dutch company, fall within the scope of the 2005 Directive and the Regulations, on their proper construction. It also submits that the proposed merger does not involve any abuse of right by the appellant and the companies involved in it and that the judge was wrong to rule that a court would refuse to give its sanction for the merger in the exercise of its discretion under the Regulations.
The legislative framework
Article 49 of the Treaty on the Functioning of the European Union (“TFEU”) (ex Article 43 EC) sets out one of the principal freedoms in the EU legal order, namely freedom of establishment. In Case C-411/03 SEVIC Systems AG v Amstgericht Neuwid [2005] ECR I-10805; [2006] All ER (EC) 363, decided by reference to general provisions of the EC Treaty before the 2005 Directive came into effect, the ECJ held that cross-border merger operations
“constitute particular methods of exercise of the freedom of establishment, important for the proper functioning of the internal market, and are therefore amongst those economic activities in respect of which Member States are required to comply with the freedom of establishment laid down by Art. 43 EC” (para. [19]).
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