Corporate Law Update

• The court approved a cross-border merger with the ability to reverse it if a no-deal Brexit took place before the merger completed
• The court finds that pension trustees did not owe a fiduciary duty to an employer of which they were directors
• The Financial Conduct Authority has published new checklists to be used when submitting a prospectus, listing application or circular for approval

Court says cross-border merger can be cancelled on a no-deal Brexit

The High Court has sanctioned a cross-border merger to simplify a group structure on the basis it could be unwound if it were to become prevented by Brexit.

What happened?

Re Interoute Networks Ltd involved two interlinked cross-border mergers (CBMs) under the Companies (Cross-Border Merger) Regulations 2007, which implement the European Union (EU) cross-border merger regime in the UK.

Under the first merger, seven UK companies and one Dutch company would merge into their UK parent company (MDNX). Under the second merger, MDNX, three other UK companies and one Dutch company would merge into their UK sister company.

The Dutch companies were included in the mergers solely to ensure that there was a cross-border element. The arrangement was split into two mergers to avoid having to produce an audit report under Dutch law. The purpose of the merger was to simplify Interoute’s group structure.

The key problem was that a CBM cannot take place until at least 21 days after the court sanctions it. The sanction hearing took place on 1 April 2019, meaning the mergers could not take effect until 22 April 2019 at the earliest.

However, at the time, the UK was due to leave the EU on 12 April 2019. If the UK were to leave the EU before 22 April 2019 with no transitional arrangements in place (a no-deal Brexit), the mergers would not take effect in the Netherlands and the arrangement would not work.

What did the court do?

The court sanctioned the merger. However, it also said that, if there were any issue with enforcing the mergers in the Netherlands on 22 April 2019, Interoute could come back to court (in the court’s words, “restore the matter”) to take the implications of such a legally disruptive event into account.

The court did not elaborate on what might happen if a no-deal Brexit were to take place on 12 April 2019. Given that the framework for CBMs would simply disappear, it is hard to see what it could do other than simply rescind the merger.

What does this mean for me?

The position regarding the UK’s withdrawal from the EU remains unclear. The UK is due to leave the EU on 31 October 2019. The UK parliament has not approved the withdrawal agreement the UK government has agreed in principle with the EU, nor has it approved any alternative arrangement. If it does neither before 31 October 2019, the UK will leave the EU in a no-deal Brexit.

If the UK leaves the EU with a withdrawal agreement, the CBM regime will continue in the UK during the ensuing transitional period. However, on a no-deal Brexit, the CBM regime will simply cease to apply in the UK.

We have previously noted that any business looking to use the CBM regime to migrate into or out of the UK, or to simplify its group structure, will need to complete its merger before a no-deal Brexit happens.

This welcome decision gives a little more breathing room. However, should the UK leave the EU in a no-deal Brexit, a business will still need to ensure its merger completes before exit day if it needs the merger to become effective.

If time is running out and the merger is not critical, a business should have an additional three weeks or so to complete all pre-merger requirements to obtain court approval. But, in seeking approval for a merger so close to exit day, a business runs the risk that the merger may never happen.

Directors of pension scheme trustee did not owe duty to the sponsoring employer

The High Court has held that individuals who were both trustees of an occupational pension scheme and directors of the scheme's sponsoring employer did not owe a fiduciary duty to the employer.

What happened?

Keymed v Hillman and others concerned a company that manufactured medical equipment. The company’s directors were also the trustees of its occupational pension scheme.

The company claimed that those directors had abused their position by setting up a separate, more favourable pension scheme for themselves and adopting an investment strategy that would benefit them when they left the company. In particular, the company alleged that the directors had subordinated the company’s interests to their own.

It is worth noting that, as directors of the employer company, the individuals owed that company the full range of statutory directors’ duties. These are set out in sections 171 to 177 of the Companies Act 2006 (the Act). The court considered these separately and ultimately concluded that the directors had not breached their statutory duties to the company.

Separately, the court had to examine whether the individuals, when discharging their separate role as pension scheme trustees, owed a separate fiduciary duty to the employer.

What did the court say?

The court said they owed no such duty.

In line with existing pensions case law, the judge acknowledged that, in some cases, it may be appropriate for a pension scheme trustee to have regard to the employer’s interests. But the trustees’ primary duty was to promote the purposes for which the scheme was established, which was to provide the benefits due under the scheme to beneficiaries.

As long as the trustees complied with that duty, they could, where appropriate, have regard to the employer’s interests. But if the employer’s interests conflicted with those of the beneficiaries, the beneficiaries’ interests would prevail.

Because of this, the court said, the trustees could not owe a separate fiduciary duty to the employer. In the judge’s words, the trustees could not serve “two masters” at the same time.

What does this mean for me?

It is not uncommon for company directors also to serve as trustees of their company’s pension scheme. However, this is the first time the court has had to consider directly whether a pension scheme trustee owes a separate fiduciary duty to a sponsoring employer.

This court’s decision helpfully clarifies that, although pension scheme trustees may need to take the interests of sponsoring employers into account, they should squarely prioritise their duties as trustees of the scheme and first and foremost act to promote the purposes for which the scheme was established.

In this case the directors did not breach their statutory duties to the employer company. However, this may not always be the case. Directors should take care to ensure that, where possible, they do not place themselves in a position of conflict.

FCA publishes new prospectus and Listing Rules checklists

The Financial Conduct Authority (FCA) has published new cross-reference checklists to be used when the EU Prospectus Regulation comes into effect in July. The checklists must be used to show the FCA that an issuer has complied with the disclosure requirements in the FCA’s Prospectus Rules.

The FCA has also published new Listing Rules checklists to be used when admitting securities to the Official List or when a premium-listed issuer publishes a circular.

The new checklists should be used from 21 July 2019. The old checklists will remain available until then.