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Court Guidance on Cross-Border Corporate Merger

In a case which vividly revealed the Byzantine legal complexities that can afflict cross-border corporate mergers and de-mergers, the Companies Court has come to the aid of a leading motorcycle manufacturer intent on a major reorganisation of its business in Europe.

motorbike3The English-registered company planned to merge with the sales and distribution division of a Spanish motorcycle manufacturer. This involved the de-merger of the Spanish company’s operations and the placing of its sales and distribution side into a new company. In order to avoid the new company having to undertake trading, and thus also having to comply with a welter of commercial, organisational, fiscal and regulatory requirements, it was envisaged that the cross-border merger should become effective a scintilla of time after the completion of the de-merger.

Spanish law placed significant obstacles in the way of taking that course and it was therefore proposed to de-merge the Spanish company’s sales and distribution division into an Italian ‘bucket company’ which would then be merged by absorption into the English company.

The proposed cross-border merger had to be sanctioned by the Court and the first step in that process was to convene a meeting of the English company’s sole shareholder, its Japanese parent. If sanctioned, the merger would take effect on a specified date at least 21 days after the date of the Court’s order.

On the basis that the Italian company was to be used as a ‘mere conduit’ for the transfer of the Spanish company’s sales and distribution business, the English company was concerned that the arrangements might be viewed as an abuse of process and sought the Court’s guidance on that issue.

The Court found that the proposals were ‘not deliberately abusive’ in that the English company was not seeking to manipulate the Court process in order to avoid the requirements of cross-border merger regulations. The company was engaged in the genuine and proper reorganisation of its business and the Court observed that there was a plain commercial justification for the proposals, arising out of the organisational and regulatory context.

In directing the convening of the required shareholders’ meeting, the Court noted that, in deciding whether to sanction the arrangements in due course, the Court would be able to look at the reality of the transactions and subject them to proper scrutiny in considering whether they would adversely affect the interests of stakeholders in any of the merging or de-merging companies.