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Katherine Apps in first Court of Appeal case on cross border mergers

The Court of Appeal today handed down its judgment on the first case to be heard in the Court of Appeal on the operation of the Cross Border Mergers Regulations 2007 (the CMBR”) in Easynet Global Services Ltd HERE

In the Companies Court Birss J had held that a proposed merger between several of the Easynet group of companies (including a Dutch subsidiary) was a “device” such that it fell outside of the scope of the CBMR and Cross-Border Mergers Directive 2005/56/EC. He refused to sanction the proposed merger.

The judgment of Birss J has been criticised in the legal press as causing uncertainty. The company appealed to the Court of Appeal.

The Court of Appeal invited the Secretary of State for Business Energy and Industrial Strategy to intervene. Katherine Apps was instructed by the Government Legal Department for the Secretary of State.

The judgments of the Court of Appeal set out guidance as to how the Companies Court should approach applications for approval of cross border mergers under the CBMR in future.The Court of Appeal accepted the submissions of the Secretary of State.

In summary, the Court of Appeal held that:

  • Firstly, “the Court is not a rubber stamp but has an important role to fulfil” in approving cross border mergers [26].
  • Secondly, the legal context to the CMBR is one which falls within the scope of the freedom of establishment under Article 49TFEU. The CMBR are intended to facilitate cross border mergers [28].
  • Thirdly, the wish of the UK companies to subsume an EU established company in a new corporate entity provided a sufficient cross border element in itself. There would be a material restriction on the right of freedom of establishment if the UK’s cross border regime made it more difficult to proceed with a cross border merger where it was proposed to include a foreign subsidiary of the UK company in another Member State which had operations which were small in scale or which were dormant [30].
  • Fourthly, legal certainty is especially important in this area. Corporate groups which plan to reorganise their corporate structure need to know where they stand so they can plan their affairs [31].
  • Fifthly, in principle, it is open to a Court to refuse to sanction a cross border merger if the EU law test for an abuse of right is met [33] and [41], but:
    • Absent fraud, the reasons why a company chooses to incorporate in one member state rather than another are irrelevant [42], [61]-[62];
    • A dormant company may rely on the freedom of establishment [42];
    • A subjective intention of avoiding tax is not sufficient to establish an abuse of right [43];
    • By analogy with a purely domestic company law case, the facts of In re Bugle Press Ltd [1961] Ch 270 are likely to have been an “abuse” under EU law [54]-[55].
  • Sixth, the Court has a discretion under regulation 16 of CMBR but that must be exercised consistently with the companies’ EU law rights.  Although the Court of Appeal expressly did not resolve “ a definitive position” between the divergent of views at first instance between Re Diamond Resorts (Europe) Ltd [2012] EWHC 3576 (Ch); [2013] BCC 275 (Sales J); Re Livanova Plc [2015] EWHC 2865 (Ch) (Morgan J); and Re M2 Property Invest Ltd [2017] EWHC 3218 (Ch) (Snowden J), the Court of Appeal observed that the primary responsibility for assessing the interests of creditors and employees lies with the member state of establishment of each transferring entity (and not on the Court or body tasked with approving the final proposed merged entity under regulation 16 CBMR).  This suggests that the correct approach is more likely to be that in Re Livanova.

The Court of Appeal did not consider the position in the future post Brexit. Littleton Chambers barristers are able to advise on a wide variety of areas likely to be affected by the UK’s departure from the EU. Please contact our clerks for further details:

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