ITAU BBA International Ltd, Re

This application, which I heard on 3 May 2012, raises a short but important point on the construction of the Companies (Cross-Border Mergers) Regulations 2007 (SI 2007 No. 2974) (“the Merger Regulations”). The question concerns one of the three types of cross-border merger for which the Merger Regulations make provision in regulation 2, namely a “merger by absorption” whereby (in short) one or more transferor companies transfer all their assets and liabilities to an “existing transferee company”. The cross-border element arises from the requirements (in regulation 2(c) and (d)) that at least one of those companies is a UK company (defined as a company within the meaning of the Companies Acts, subject to certain immaterial exceptions) and at least one of them is an EEA company (defined as a body corporate governed by the law of an EEA State other than the United Kingdom). “Existing transferee company” is defined in regulation 3(1) as meaning “a transferee company other than one formed for the purposes of, or in connection with, a cross-border merger”. “Transferee company” is in turn defined as meaning “a UK company or an EEA company to which assets and liabilities are to be transferred by way of a cross-border merger”.

A second type of cross-border merger under the Merger Regulations is a “merger by formation of a new company”. This type of merger is defined in regulation 2(4) as an operation in which there are two or more transferor companies (at least two of which are each governed by the law of a different EEA State), and (among other requirements):

“(b)

every transferor company is dissolved without going into liquidation, and on its dissolution transfers all its assets and liabilities to a transferee company formed for the purposes of, or in connection with, the operation.”

The third type of merger is a “merger by absorption of a wholly-owned subsidiary”, defined in regulation 2(3) as an operation in which:

“(a)

there is one transferor company, of which all the shares or other securities representing its capital are held by an existing transferee company.”

The other requirements of this type of merger are that one of the companies is a UK company, the other is an EEA company, the transferor company is dissolved without going into liquidation, and on its dissolution it transfers all its assets and liabilities to the transferee company.

It can be seen from this brief description of the three types of cross-border merger under the Merger Regulations that the concept of an “existing transferee company” forms part of the requirements for the two types of merger by absorption, namely “merger by absorption” as defined in regulation 2(2) and “merger by absorption of a wholly-owned subsidiary” as defined in regulation 2(3). It can also be seen that the language of the definition of “existing transferee company” appears (at least) to reflect, and to be complementary with, the requirement in regulation 2(4)(b) that the transferee in the third type of merger, namely a “merger by formation of a new company”, should be a company “formed for the purposes of, or in connection with, the operation”. Clearly, a company so formed cannot be an existing transferee company, because an existing transferee company is defined as a transferee company other than one formed for the purposes of, or in connection with, a cross-border merger.

But what if the proposed transferee company for a merger by absorption of either type is a company formed for the purposes of the merger? On a literal reading of the definition of existing transferee company, it would appear that such a company is disqualified from acting as the transferee. As I shall explain, however, there is no discernible policy reason for such a restriction, and none is to be found in the EU Directive which the Merger Regulations were made to implement (Directive 2005/56/EC of 25 October 2005 on cross-border mergers of limited liability companies, “the Directive”). Is it therefore possible to construe the definition in such a way that the limitation applies only to exclude a company formed for the purposes of, or in connection with, a merger by formation of a new company? That is the question which I now have to decide. It arises in the context of a proposed merger by absorption between the applicant, Itau BBA International Limited, which I will call “the Company”, and Banco Itaú BBA International S.A. (“Itaú BBA Portugal”), a company incorporated in Portugal.

The relevant facts may be shortly stated. Both the Company and Itaú BBA Portugal are wholly owned subsidiaries of a Portuguese intermediate holding company, Itaúsa Portugal, SGPS, S.A. (“Itaúsa Portugal”). They are indirectly owned by Itaú Unibanco Holding S.A., which is a publicly listed joint stock company with its head office in Brazil. The Itaú Group is the largest Latin American bank, with over 105,000 employees and operations in 19 countries throughout the Americas, Asia and Europe. The effect of the proposed merger will be to transfer the headquarters and domicile of the Itaú Group’s European wholesale banking operations from Lisbon to London.

Itaú BBA Portugal currently carries on wholesale banking activities in the UK through its London branch, which was authorised with effect from 13 November 2002 under the so-called “passporting” provisions of the Banking Consolidation Directive (Directive 2006/48/EC). The London branch began its banking activities in January 2003 and since then has become increasingly important for the Itaú Group, both in size and turnover, due to the strategic and geographic importance of London as a financial centre. A substantial part of the Itaú Group’s European wholesale banking activities and resources is currently allocated to the London branch, which has 44 employees.

The Company was incorporated in England and Wales on 1 November 2010 under the Companies Act 2006 as a private company limited by shares. Its original name was Owen Howard Limited. It was incorporated as a shelf company by a firm of company formation agents, ATC Solutions Limited, and has never traded. On 26 January 2012 the Company was acquired from ATC Solutions Limited by Itaúsa Portugal, which then became, and remains, its sole shareholder. On 27 January 2012 the Company’s name was changed to its present name.

The Company was acquired in order for it to apply to the Financial Services Authority (“the FSA”) for the necessary permissions and authorisation to enable it to carry on wholesale banking activities and become the centre of the Itaú Group’s European wholesale banking operations. In practice, only a company incorporated in the UK can apply for such authorisation as a credit institution if it is to have the ability to operate both in the UK and elsewhere. The Company made its application to the FSA on 3 February 2012, and it is only if and when it is granted the necessary permissions that it will absorb the business of Itaú BBA Portugal by way of the proposed merger. I was informed that the application is unlikely to be determined by the FSA until some time later this year, and that the merger is unlikely to take place much before the end of the year.

Meanwhile, the London branch will continue to operate until the merger becomes effective. At that stage, the business of the London branch will be transferred to the Company and will become the business of the Company. It is intended that the Company’s Portuguese business will thereafter be carried out by a branch in Lisbon.

By a Part 8 claim form issued on 3 April 2012, the Company sought orders from the court for a meeting of its members to be summoned under regulation 11 of the Merger Regulations, and for an adjourned hearing of its application for a pre-merger certificate under regulation 6. In due course, it is intended that the Company will make a joint application with Itaú BBA Portugal to the Companies Court for an order under regulation 16 sanctioning the merger.

The matter came before Registrar Jones on 13 April 2012, when he decided to adjourn it to a Judge for determination of the issue whether the Company is an “existing transferee company” for the purposes of regulation 2(2)(b). His reasons for taking this course, which I respectfully endorse, were that the issue is an important one concerning jurisdiction; there is no existing precedent or guidance on the point; and if he were to decide after hearing argument that there was jurisdiction, there would be no party with an interest in appealing his decision. It is therefore desirable to have the question resolved by a High Court Judge. I should add that, as I understand it, there are already a number of other cases raising the same point which have been adjourned pending this judgment.

The recitals to the Directive make clear that its purpose was to promote the completion and functioning of the single market by laying down “Community provisions to facilitate the carrying-out of cross-border mergers between various types of limited liability companies governed by the laws of different Member States”: see recital (1). The only reference to the status of the transferee company is to be found in recital (8), which states that:

“In order to protect the interests of members and others, the legal effects of the cross-border merger, distinguishing as to whether the company resulting from the cross-border merger is an acquiring company or a new company, should be specified. In the interests of legal certainty, it should no longer be possible, after the date on which a cross-border merger takes effect, to declare the merger null and void.”

Article 1 defines the scope of the Directive as follows:

“This Directive shall apply to mergers of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community, provided at least two of them are governed by the laws of different Member States (hereinafter referred to as cross-border mergers).”

Article 2(2) then defines “merger” for the purposes of the Directive as meaning:

“an operation whereby:

(a)

one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company …; or

(b)

two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company …; or

(c)

a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital.”

It can be seen from this that:

By contrast, the transferee in the second form of merger is described as “a company that they form, the new company”. Here the focus is on the actions of the merging companies in forming a new company, separate from each of them, as a vehicle through which the merger is to be effected.

These differences are reflected in the language of article 14, which lays down the consequences of the merger. Where the merger is of the first or third types, i.e. the two types of merger by absorption, article 14(1) provides that from its effective date it shall have the following consequences:

“(a)

all the assets and liabilities of the company being acquired shall be transferred to the acquiring company;

(b)

the members of the company being acquired shall become members of the acquiring company;

(c)

the company being acquired shall cease to exist.”

Where, however, the merger is of the second type, article 14(2) says that the consequences shall be these:

“(a)

all the assets and liabilities of the merging companies shall be transferred to the new company;

(b)

the members of the merging companies shall become members of the new company;

(c)

the merging companies shall cease to exist.”

Article 4(1) provides that cross-border mergers shall only be possible between types of companies which may merge under the national law of the relevant Member States, and that a company taking part in such a merger “shall comply with the provisions and formalities of the national law to which it is subject”. By virtue of article 4(2):

“The provisions and formalities referred to in paragraph 1(b) shall, in particular, include those concerning the decision-making process relating to the merger and, taking into account the cross-border nature of the merger, the protection of creditors of the merging companies, debenture holders and the holders of securities or shares, as well as of employees as regards rights other than those governed by Article 16. A Member State may, in the case of companies participating in a cross-border merger and governed by its law, adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger.”

It is unnecessary to make detailed reference to the other provisions of the Directive. In summary, they lay down procedural requirements, require certain formalities to be observed, and deal with matters such as employee participation. For present purposes, the important point is a negative one: nowhere, either expressly or by implication, is there any suggestion that the existing company in mergers of the first type, or the parent company in mergers of the third type, must satisfy particular conditions (e.g. about their size, capitalisation, past history or economic substance). Nor is there any requirement that the acquiring company should not have been formed for the purposes of, or in connection with, the merger. Indeed, the existence of any such unstated restrictions would appear to be at odds with the general facilitative aim of the Directive.

I have already given a brief description of the three types of merger for which the Merger Regulations make provision, and explained how they derive from the Directive. The public Transposition Note for the Merger Regulations, prepared pursuant to recital (16) of the Directive in order to illustrate the correlation between the Directive and the measures transposing it into English domestic law, states explicitly that the regulations “implement the Directive’s framework of rules, enabling UK companies to engage in cross-border mergers if specified conditions are met”. The Note highlights “one significant respect” in which the regulations go beyond the Directive’s requirements: they give a company’s creditors the right to demand a meeting, and if such a meeting is held, the merger must then be approved by a majority of the creditors at that meeting. The reason given for this alteration is consistency with the requirements for “domestic” mergers in the Companies Act 2006. That apart, there is nothing to indicate that any other significant change was intended, and the note on article 2(2) of the Directive merely says: “Directive definitions reflected in definition of “cross-border merger” in regulation 2”.

Regulation 16 lays down the conditions for approval of a cross-border merger by the court, as follows:

“(1)

The Court may, on the joint application of all the merging companies, make an order approving the completion of the cross-border merger for the purposes of Article 11 of the Directive (scrutiny of completion of merger) if –

(a)

the transferee company is a UK company;

(b)

an order has been made under regulation 6 (court approval of pre-merger requirements) in relation to each UK merging company;

(c)

an order has been made by a competent authority of another EEA State for the purposes of Article 10.2 of the Directive (issue of pre-merger certificate) in relation to each merging company which is an EEA company;

(d)

the application is made to the court on a date not more than 6 months after the making of any order referred to in sub-paragraph (b) or (c);

(e)

the draft terms of merger approved by every order referred to in sub-paragraphs (b) and (c) are the same; and

(f)

where appropriate, any arrangements for employee participation in the transferee company have been determined in accordance with Part 4 of these Regulations (employee participation).”

The consequences of a cross-border merger are then set out in regulation 17, which reflects and implements article 14 of the Directive.

It will be noted that regulation 16(1)(a) requires only that the transferee company should be a UK company; and the definition of “transferee company”, which I have already quoted in paragraph 1 above, is purely descriptive and says nothing about the reason why it was formed. Further, the pre-merger requirements which have to be satisfied before the earlier court hearing referred to in regulation 16(1)(b) contain nothing which throws any light on the definition of “existing transferee company”. One of those requirements, contained in regulation 7, is that the directors of the UK merging company must draw up and adopt a draft of the proposed terms of the cross-border merger, and regulation 7(2) states the matters of which the draft must give particulars. In relation to each transferor and transferee company, the only requirement in regulation 7(2)(a) is that particulars must be given of its name, its registered office, its legal form and the law by which it is governed. Other pre-merger requirements are set out in regulations 8 to 10 and 12 to 15, but again they throw no light on the present problem. Part 4 of the regulations (regulations 22 to 64 inclusive) contains detailed rules about employee participation. Finally, Part 5 (regulations 65 and 66) deals with consequential amendments to the insolvency legislation.

The starting point in consideration of the question must in my judgment be the wording of the Directive, which (as I have explained) the Merger Regulations were intended to transpose into English domestic law without significant extension (save in relation to approval by creditors). Under the Directive, the only relevant requirement in relation to the transferee company, in the case of a merger by absorption, is that it should be “another existing company”: see article 2(2)(a). On the face of it, this requirement imports nothing more than that the transferee company should already be in existence at the time of the proposed merger. There is an obvious contrast with the requirement in the case of a merger by formation of a new company, where the transferee is described as “a company that they [i.e. the transferor companies] form, the new company”. In relation to a merger by absorption of a wholly-owned subsidiary, the Directive does not refer in terms to an existing company, but it is clear that the reference in article 2(2)(c) to “the company holding all the securities or shares representing its capital” must again be to a parent company which is in existence at the date of the transfer.

My next point is that if the Secretary of State for Business, Enterprise and Regulatory Reform, by whom the Merger Regulations were made in exercise of powers conferred by section 2(2) of the European Communities Act 1972 and various sections of the Companies Act 2006, had intended to widen the scope of the Directive by introducing a requirement that the transferee company in mergers by absorption should not have been formed for the purposes of, or in connection with, a cross-border merger, one would expect the reasons for such a policy decision to have been clearly articulated. One would also expect to find an express reference to the point in the Transposition Note in connection with article 2(2). Furthermore, the concept of a company being “formed” for a particular purpose is not a familiar one under English law. In the context of the Directive, the references to “forming” a company (for example in articles 1 and 2(2)(b)) are no doubt meant to have an autonomous meaning applicable to all Member States, and to refer to the formalities of incorporation. In those circumstances, if the reference to the purposes of the formation of the company, in the definition of “existing transferee company”, was intended to do more than mirror similar wording in the Directive, one would expect the intended meaning to have been spelt out with clarity. Yet no explanation of any kind, beyond that inherent in the phrase itself, is to be found anywhere in the regulations.

A related point arises from the use in the present case of a shelf company. The acquisition and use of shelf companies, for a variety of corporate purposes, is of course commonplace; but if the focus on the formation of such a company is confined to the legal formalities which brought it into existence, it will probably be impossible to discern any purpose for its formation beyond its mere creation as a body corporate. This in turn suggests that the reference in the definition to the company’s formation must be meant to go beyond the original legal formalities, but in that case the absence of explanation and detailed provision becomes inexplicable.

Nor is it possible to identify any plausible mischief at which the definition might be aimed. This is particularly clear in relation to mergers by absorption of a wholly-owned subsidiary. In such cases, the two companies inevitably form a single economic unit before the transfer takes effect, and the entirety of the assets and liabilities of the subsidiary will be transferred to its parent. I am unable to think of any sensible purpose that would be served by the restriction, and counsel for the Company was likewise unable to suggest one. Furthermore, if such a purpose could be identified, one would again expect to find the details spelt out. For example, if the intention had been that the transferee company should be an existing company of substance, it would be necessary to know for how long it had to have been in existence, the test for determining whether it had sufficient assets, what activities it was necessary for it to have carried on, and so forth.

As counsel submitted, if the intention was to import notions of substance, purpose or temporality in determining what is “an existing transferee company”, it is difficult, if not impossible, to know where to draw the line. Counsel illustrated the problem by reference to a number of possible examples:

Counsel further submitted that, if the intention actually was to define “existing transferee company” in accordance with the literal meaning of the definition, the restriction could be circumvented with relative ease by adopting an alternative structure. There is nothing in regulation 2(4) which says that any of the transferors for a merger by formation of a new company may not itself be a new company. Thus, for example, it would seem to be possible for a company in Portugal to incorporate two UK companies, one to be a transferor company (Newco A) and the other to be the transferee company (Newco B). The Portuguese company and Newco A would then transfer all their assets and liabilities to Newco B under regulation 2(4) as a merger by formation of a new company. In substance, therefore, the Portuguese company would be able to effect the transfer of its assets and liabilities to a newly incorporated company in the UK under the Merger Regulations by the simple expedient of bringing into existence for a short period another newly incorporated UK company. For good measure, submitted counsel, Newco A could be given some nominal assets and/or liabilities upon incorporation, to meet a possible argument that regulation 2(4)(b) might be construed so as to require a transferor to transfer some assets and/or liabilities.

In the light of all these considerations, it seems to me clear that something must have gone wrong with the drafting of the Merger Regulations. The intention was to transpose into English law the three types of merger described in the Directive, but on a literal reading of the definition of “existing transferee company” an entirely pointless and unexplained restriction was apparently introduced. No precedent for the restriction can be found in the Directive itself, and if the Secretary of State had intended to broaden the scope of the Directive in this important respect, I find it inconceivable that this would have been done without explanation, and without any reference to it in the Transposition Note. To my mind, everything points to the conclusion that the definition was intended to do no more than to exclude from either type of merger by absorption a transferee company formed for the purposes of, or in connection with, a merger by formation of a new company. The simplest way to make this clear, in my judgment, is by reading in the words “by formation of a new company” at the end of the definition of “existing transferee company”, so that the definition reads:

““existing transferee company” means a transferee company other than one formed for the purposes of, or in connection with, a cross-border merger by formation of a new company.”

Mr Horan did not refer me to any authority on the extent to which the court may correct errors by construction, but the relevant principles are well-known, and in my view the present case falls comfortably within the principles restated by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, at [21] to [25]. In particular, Lord Hoffmann said at [25]:

“What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.”

Lord Hoffmann also said at [15] that it “clearly requires a strong case to persuade the court that something must have gone wrong with the language”. I have that warning well in mind, but in my judgment this is one of those cases where it is apparent that a drafting error has been made, and it is also clear in substance (the precise form of words does not matter) what the draftsman intended to say. To correct an error of this nature is part of the interpretative function of the court, and does not trespass into the forbidden territory of rewriting a statute.

I should add by way of postscript that I have not referred to each and every argument placed before me by counsel, but have concentrated on those which seem to me most cogent. This is in no sense a criticism of counsel, but merely reflects the differences between the degree of detail appropriate for a judgment on the one hand, and a learned article on the other. In particular, I was referred to some similar language used in Part 27 of the Companies Act 2006 (Mergers and Divisions of Public Companies, sections 902 to 941), which is derived from the Third Council Directive 78/855/EEC, sometimes referred to as the Domestic Mergers Directive. There are some clear similarities between the language there used and that used in the Merger Regulations, but (as counsel accepted) any illumination from the comparison is uncertain, and is further reduced by the extraordinary fact that the provisions appear in practice to have been a complete dead letter since they first came into force on 1 January 1988: see Gower & Davies’ Principles of Modern Company Law (8^th edition, 2008) at 1069 – 1071 and Jonathan Rickford, “The Proposed Tenth Company Law Directive on Cross Border Mergers and its Impact in the UK” (2005) 16 EBLR 1393 at 1398. Counsel was able to add that this assessment is borne out by the combined experience of himself and fellow practitioners in Erskine Chambers.

In the event, for the reasons which I have given, I will declare that the Company is an “existing transferee company” within the meaning of the Merger Regulations, and that the court therefore does have jurisdiction to entertain the present application.