Corporate Law Update

This week we look at a case where the High Court had to decide whether to approve a cross-border merger and concluded it was not entitled to take the position of creditors into account when deciding whether to grant that approval. We also look at some changes to certain practice statements and checklists issued by the Takeover Panel.

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Court could not consider creditors when approving cross-border merger

In Re M2 Property Invest Limited [2017] EWHC 3218 (Ch), the High Court decided it could not examine or consider the interests of creditors when deciding whether to give final approval to a cross-border merger (“CBM”).

Background

The CBM regime provides a framework under which two or more companies from two or more EEA states may merge into a single surviving company. The other merging companies are dissolved. A CBM can be a flexible tool for dissolving companies without a formal liquidation, or for “moving” a company’s office or operations to another EEA state.

A CBM comprises two stages. At the first stage (“stage 1”), the competent authority of each country in which one of the merging companies is located issues a “pre-merger certificate”, confirming the relevant company has complied with the regime.

Then, within six months, at the second stage (“stage 2”), the competent authority of the surviving company’s country issues a final order confirming the CBM and giving it effect.

What happened here?

This case concerned a proposed merger of M2 Property Investment Limited (“M2”), an English company, and its wholly-owned subsidiary, Vendor Wind Service Sp. z o.o. (“Wind”), a Polish company. Under the merger, Wind would be absorbed into M2 and would cease to exist.

The Companies Court in England had issued a pre-merger certificate for M2, confirming that M2 had complied with the steps required under the regime. Likewise, the Gdańsk-North Court in Poland had issued a pre-merger certificate for Wind.

The evidence before both courts had been that the merger would benefit M2 and Wind, as it would be cheaper than liquidating Wind and would improve the position of M2’s and Wind’s creditors. In support of this, the Polish court was provided with Wind’s accounts for its financial year ending 31 December 2016, which showed that Wind was solvent and had ceased trading.

However, when the merger came before the High Court for final approval at stage 2, it was apparent that Wind had not in fact ceased trading, and that, since 31 December 2016, its financial position had changed significantly (albeit it remained solvent).

It was therefore clear that the evidence presented before the Polish court had been inaccurate.

The High Court had to consider two questions:

  • Could it re-evaluate the Polish court’s decision to issue the pre-merger certificate to Wind?
  • Could it take the position of Wind’s and M2’s creditors into account when deciding whether to approve the CBM?

What did the court decide?

The court said it could not re-evaluate the Polish court’s decision to issue the pre-merger certificate. The wording of the legislation was clear: once the Polish court had issued its certificate, it was conclusive, even if it had been issued based on inaccurate evidence.

On the second point, the court decided it could not take creditors’ interests into account. The judge said that it was for the domestic legal systems in England and Poland to provide protection for creditors, and not for the court to scrutinise creditors at stage 2.

The court’s decision on both points was influenced heavily by the fact that there are already mechanisms in England and in Poland for creditors to object to a proposed CBM.

In England, a creditor can petition the court to convene a separate meeting of creditors to approve the merger, in much the same way as for a merger by way of scheme of arrangement. In Poland, once a CBM is published, a creditor can apply for its claims against the merging company to be secured.

Both regimes rely on a creditor taking action. They do not require a court to inquire proactively into the status of creditors.

The judge was concerned that, if the English court were required to assess creditors’ interests at stage 2, it would create inconsistency in the way the CBM regime is applied across EEA states. It would also allow a foreign creditor who objects unsuccessfully at stage 1 another opportunity to object at stage 2 in a different country, potentially creating issues around conflicts of laws.

Practical implications

Ultimately, the court did not have to reach a view on these points, because it was satisfied that the Polish court would have issued the pre-merger certificate for Wind even if it had been provided with the correct financial information. The court’s comments are, therefore, non-binding.

However, they are an interesting development in a somewhat unclear path of law. In a previous case – Re Diamond Resorts – the High Court found that it did have the power to look into creditors’ interests on stage 2, depending on the level of investigation that has been carried out at stage 1 and the nature of the authority that grants the pre-merger certificate.

However, in a later case – Re Livanova plc – the judge cast doubt on this approach and wondered whether the court was entitled to do this at all. However, unlike the decision in Diamond Resorts, which was binding, the judge’s comments in Livanova were purely advisory.

Cases since have generally followed or approved the approach in Diamond Resorts (for example, in Re GET Business Services Ltd and another and Re International Game Technology plc; Re GTECH SPA, rather than Livanova. However, whilst the judge’s comments in M2 are non-binding, it perhaps heralds a new line of thinking, namely that the court’s discretion is in fact more limited than previously thought.

For creditors, the decision in M2 emphasises the need to remain alive to a proposed CBM and to raise any objection to the merger at an early stage. Creditors may well not be able to wait until the final approval hearing to make a challenge.

Takeover Panel publishes practice statement and checklists

The Takeover Panel has published new Practice Statement 32. The statement provides guidance on when Rule 21.1(a) applies after an offeree company has rejected a possible offer. Rule 21.1(a) prevents an offeree company from taking any action that might frustrate a possible offer for its shares.

The Statement confirms that Rule 21.1(a) will apply for so long as an offeree company has received a formal approach from an offeror or potential offeror. Moreover, if the offeree company unequivocally rejects an approach and does not know whether the potential offeror remains interested, Rule 21.1(a) will continue to apply until 5 p.m. on the second business day after that rejection.

The Statement confirms that Rule 21.1(a) will apply for so long as an offeree company has received a formal approach from an offeror or potential offeror. Moreover, if the offeree company unequivocally rejects an approach and does not know whether the potential offeror remains interested, Rule 21.1(a) will continue to apply until 5 p.m. on the second business day after that rejection.

In addition, Practice Statement 28 has been amended as a result of the recent changes to the Code relating to competing asset sales and no-intention statements. (See our Corporate Law Update for the week ending 15 December 2017 for more information on these changes.)

The Panel has also published a new checklist for a Rule 21.1 circular/announcement. An offeree company’s financial adviser should complete this checklist where an offeree company is proposing to issue a circular to shareholders under Rule 21.1(d)(iii) to approve potentially frustrating action, or an announcement under Rule 21.1(e) that the Panel has approved potentially frustrating action that is conditional on an offer being withdrawn or lapsing.

Finally, the Panel has published updated checklists for a possible offer (Rule 2.4) announcement, firm offer (Rule 2.7) announcement, offer document, offeree board circular, scheme circular and intention statements schedule.

The new and updated checklists are effective immediately.

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