Law Times

Law Times • January 25, 2010 FOCUS PAGE 9 New U.K. rules make pure mergers possible Canadian companies can take advantage of cross-border provisions BY JULIUS MELNITZER For Law Times U ntil recently, Britain had no process by which companies, including Canadian multinationals operat- ing there, could engage in a true merger through the absorption as opposed to the acquisition of another business. Accordingly, pure mergers, even in the domestic context, have been relatively rare in Britain. But the arrival of new regu- lations in 2007 made mergers possible in the cross-border context. Th e regulations im- plemented the European cross- border mergers directive of 2005, which allows companies incorporated in any country within the European economic area to merge with businesses incorporated elsewhere in the region. Th e regulations apply to three types of mergers: • Merger by absorption where companies in states within the economic zone absorb businesses in another mem- ber state. • Merger by absorption of a wholly owned subsidiary where a company absorbs subsidiaries in another state. • Merger by formation of a new company where an enti- ty absorbs two or more busi- nesses in diff erent states. For Canadian businesses, it's important to note that in all of these cases, the absorbing com- pany need not be the parent. For example, the subsidiary of a Canadian business incorporated in any state within the economic zone could use the regulations to create a single European-wide branch of the parent company. "What we have now is a court-approved process for cross-border mergers that has distinct advantages over other available options," says Gary McLean, a mergers-and-acqui- sitions partner at Allen & Overy LLP in London, England. "Th e very distinct advantage of the regulations is that they incor- porate the concept of universal succession by operation of law, which means the elimination of the cumbersome steps — including liquidation of the transferor — typically required to effi ciently amalgamate busi- nesses following acquisition." Uptake, however, has been slow with nary a transaction using the new procedure in the year after it came into force. But thanks to the advantages of a merger over the traditional ac- quisition or transfer process, the trend is on an upswing. "Companies started to use these regulations early in 2009, but there have been only about a dozen cases to date [that took advantage of the process]," says Helen Johnson, a corpo- rate partner at CMS Cam- eron McKenna LLP, also in London. "So while the regula- tions remain largely unknown, there have been an increasing number of cross-border merg- ers sanctioned recently by the English courts." Using the regulations in- a volves court process that occurs concurrently in the jurisdictions of the transferee (the absorbing entity) and the transferor (the entity being absorbed). Each of the merger companies must obtain a "pre- merger certifi cate" from the ap- propriate court or tribunal in its country of incorporation. Th e British procedure re- quires the company to present a merger report containing the draft terms of the deal; a direc- tors' report citing the eff ect on shareholders, creditors, and em- ployees; and an independent ex- pert's report confi rming that the valuation methods and share exchange ratios are reasonable. Th e company can waive the expert's report, however, if the shareholders unanimously agree to do so and if the merger is an absorption of a wholly owned subsidiary or the transferee al- ready holds at least 90 per cent of the transferor's securities. Seventy-fi ve per cent of share- holders, by value, of each share- holder class must approve the merger. Creditors can also ask the court for a separate vote. After obtaining the pre-merg- er certifi cates from all the rele- vant jurisdictions, the transferee applies for fi nal approval to its domestic court. Once the court approves the transaction, the assets and liabilities, including employees of the transferor, au- tomatically transfer to the trans- feree. No further liquidation or transfer proceedings are neces- sary, and the shareholders of the transferor automatically become shareholders of the transferee. U.K. tax relief provisions may also apply to cross-border mergers, making them tax- neutral. As well, the creation of a single corporate entity can generate business effi ciencies. Nevertheless, the fact that the new process involves court in- tervention may have impeded its acceptance. "Courts scare a lot of peo- ple," Johnson says. "You have to retain counsel, and there are usually a couple of hearings, meaning that using the regula- tions could potentially be more expensive than going the tradi- tional acquisition route." Indeed, the notion of a court process brings the prospect of undue delay to the minds of many. "You could be looking at a six- to 12-month delay if you used this process in a typi- cal [merger] transaction," says Tom Mercer of Ashurst LLP. Th ere's also a degree of in- fl exibility to the scheme. "It's true that after you jump through the hoops and get your approval, all the assets and li- abilities transfer automatically," says Nigel Gordon, a partner in the London offi ce of Fasken Martineau DuMoulin LLP. LT0125 For a 30-day, no-risk evaluation call: 1.800.565.6967 Canada Law Book is a Division of The Cartwright Group Ltd. Prices subject to change without notice, to applicable taxes and shipping & handling. ADDY_Competition Law Service (LT 1-4x3).indd 1 www.lawtimesnews.com 1/20/10 9:43:42 AM ORDER your copy today Looseleaf & binders (4) • $510 Releases invoiced separately (2-3/yr) P/C 0491030000 Vol. 1 ISBN 0-88804-053-9 Vol. 2 ISBN 0-88804-169-1 Vol. 3 ISBN 0-88804-324-4 Vol. 4 ISBN 0-88804-444-5 "But what if you didn't want to transfer all the assets and liabilities, as might be the case for the transferor's pen- sion liabilities?" Th e process also requires the protection of any em- ployee-participation rights (to board-level representation, for example) that exist in any of the merging companies. "Th is could result in em- ployee-participation rights being given to U.K. employ- ees where none previously ex- isted, as where a company in- corporated in a country such as Germany or Sweden that mandates employee-participa- tion rights merges with a U.K. company," McLean says. Finally, the regulations may not deal adequately with third-party contractual provi- sions prohibiting a transfer of the rights and liabilities imposed by the agreement. While the regulations provide for the transfer of all assets and liabilities, they also require that the transferee take the legal steps necessary for the deal to be eff ec- is advantageous to have one entity operating branches in diff erent jurisdictions as op- posed to having separate cor- porate subsidiaries in each of those jurisdictions," McLean says. Intra-corporate cross- border mergers in regulated industries, such as banking and insurance, may fi nd the greatest benefi ts in the regu- lations. Indeed, the Gold- man Sachs investment bank, HSBC Group, XL Capital Ltd., and several internation- al fund managers are among those that have used the pro- cess so far. "Financial institutions can The expense of going through the courts may be one factor behind the limited use so far of the new provi- sions, says Helen Johnson. for breach of contract if they could prove losses from the transfer," McLean says. Th e upshot is that the regu- lations may not be the most ef- fective tool for typical merger- benefi t from having fewer regulated subsidiaries, par- ticularly where capital has to be allocated separately to those subsidiaries or where the regulatory regimes governing the subsidiaries are otherwise stricter than the one governing the parent," McLean says. "Re- ducing the number of subsidiar- ies can also reduce an organiza- tion's compliance burden." It's true that after you jump through the hoops and get your approval, all the assets and liabilities transfer automatically. tive in relation to other persons. "Our view is that to give ef- fect to contractual provisions that prohibit transfer would defeat the purpose and intent of the directive and the regu- lations and that third parties aff ected by the transfer would be limited to suing for damages and-acquisition transactions. But they would seem particu- larly suited to situations where shareholder and third-party consent are not live issues. "Initially at least, the great- est use of the regulations has been in intra-corporate group cross-border mergers, where it Th e regulations could also assist in the restructuring of in- solvent companies. "It would certainly give par- ties to an insolvency proceeding a greater choice regarding the most appropriate jurisdiction in which to carry out their restruc- turing," McLean says. LT Competition Law Service Through regulatory analysis and a comprehensive digest of cases, this resource offers practical insight into what constitutes reasonable competitive practices — and what breaks the law. • • • This work includes: the full text of the the Find: • • • • , fully digested and up to date digested with amendments the Competition Tribunal Rules new information bulletins and enforcement guidelines on the revised merger review process recently added technical backgrounders from the Competition Bureau on the merger of TSX Group and Bourse de Montréal new speeches from the Commissioner of Competition on the 2009 amendments to the Act public statements, international agreements, reports and consultation papers George N. Addy and W illiam L. Vanveen Competition Tribunal Act Competition Act

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• Leader Passes Away
• Traffic Woes
• Focus On Mergers and Acquisitions