Diamond Resorts (Europe) Ltd, Re

THE JUDGE: This is an application for approval of cross-border merger arrangements under the Companies (Cross-Border Mergers) Regulations 2007. I am satisfied on the evidence that has been put before me that the preliminary steps which need to be fulfilled as pre-merger requirements have been complied with. The proposed merger relates to an English company, Diamond Resorts (Europe) Limited (“DREL”), which is to be the resultant corporate entity which absorbs a series of 14 Spanish subsidiary companies. Once they are merged into DREL, DREL will assume their rights and liabilities and their existence will be terminated, following procedures under Spanish law.

The evidence on which I proceed is contained primarily in witness statements of Susan Crook, who is a director of DREL and who is duly authorised by the board of directors of that company to make her witness statements on DREL’s behalf. DREL is a non-trading holding company in relation to the 14 Spanish subsidiaries. The 14 Spanish subsidiaries are trading entities, particularly operating in the timeshare business. DREL is in turn held by a holding company, Diamond Resorts Group Holdings plc (“DRGH”).

The application is made under regulation 16 of the 2007 Regulations, which provides at regulation 16(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.”

It then sets out certain conditions which need to be satisfied.

In the circumstances of the present case, it is the English court which is the court required at the last stage of the cross-border merger procedure to approve this cross-border merger, in compliance with the procedures set out in the relevant Directive, as implemented in English law by the 2007 Regulations. Mr Thornton makes the application on behalf of DREL and all 14 Spanish subsidiaries.

Mr Thornton accepts that, since the Court has a discretion under regulation 16(1) whether to approve the merger, it is required to consider whether it is proper to exercise that discretion in favour of approving the merger, involving a process of review over and above simply satisfying itself that the various pre-merger steps have indeed been undertaken. He submits that the exercise to be undertaken by the Court is to examine the proposed merger with a view to being satisfied that it is does not adversely affect any stakeholder in any of the merging companies (whether shareholder, employee or creditor) in any material way, and, further, that there is no other good reason why approval of the proposed merger should be refused. In my judgment that is the correct test to be applied under regulation 16(1).

A question arises in the circumstances of a case like the present, what reference should be made by the English Court to the interests of shareholders, employees and creditors of the incoming companies to be merged, which are companies located in a foreign jurisdiction? In relation to such a transaction it is the responsibility of the foreign EU Member State under the relevant Directive to nominate a “competent authority” to scrutinise the proposed transaction at the pre-merger stage. In the case of Spain it has nominated the Commercial Registry in Spain as the relevant competent authority and that authority has issued the relevant certificates required by the Directive and the 2007 Regulations in relation to the Spanish companies.

As Mr Thornton informs me, Member States have a considerable discretion as to what body they designate as the competent authority for the purposes of the Directive. Such designation may range from a court being the nominated competent authority (such as in this country and in Germany), through other bodies such as a company or commercial registry (as in Spain) to public notaries (as in Italy). The question arises of the role of this Court in scrutinising a transaction involving a foreign company where pre-merger certification has been granted by the competent authority in the home state of that company. The issue is of particular relevance in relation to the transaction under review in this case, in light of certain matters which I examine below.

The proposed resultant merged company, DREL, was at the end of last year, according to its statutory accounts, insolvent on a balance sheet basis and dependent on the support of DRGH under a letter of comfort to continue as a going concern; whereas 13 of the 14 Spanish subsidiaries which are proposed should be merged into DREL were solvent companies. An issue could therefore arise as to whether a significant material detriment would be suffered by, in particular, creditors of those companies if the merger proceeded. But the Commercial Registry in Spain has granted pre-merger certification for the merger of those companies into DREL. Does this Court’s role in deciding how to exercise its discretion under regulation 16(1) involve looking behind that certification?

In my view, as a matter of general principle, the weight that this Court should accord to the pre-merger certification by a foreign competent authority under the Directive will depend upon the nature of the competent authority and the extent of any investigation which it appears that competent authority may have conducted into the benefits or dis-benefits of the proposed transaction for shareholders, employees and creditors of the companies falling within its jurisdiction. In the circumstances of the present case, Mr Thornton accepts that he is unable to say that the Spanish Commercial Registry has the same status as a full court would have and he is unable to point to any substantive investigation by the Commercial Registry into the commercial merits or demerits of the proposed transaction from the point of view of shareholders, employees or creditors of the Spanish companies which it is proposed should be merged into DREL.

In those circumstances I consider that the proper function for this Court in the exercise of its discretion under regulation 16(1) of the 2007 Regulations is to examine with care the question whether, if the merger proceeds and is authorised, stakeholders in the merging Spanish companies will suffer a material detriment such that the merger ought not to be approved.

The object of the merger is to simplify the corporate structure of the group of companies to which DREL and the Spanish companies belong, thereby consolidating them into one operational unit. The directors of DREL hope that the mergers will lead to enhanced synergy, simplification of procedures and administration and a reduction of costs. These are in my judgment entirely legitimate and proper objectives likely to be of potential benefit to all the companies which are to be merged.

So far as the financial position of DREL is concerned, I do not consider that it would be appropriate to place any significant weight on the extant letter of comfort from DRGH in favour of DREL, both because I have no evidence before me of the financial substance of DRGH which would allow me to make an assessment of the value of that letter of comfort, and also because it is due to expire at the end of this year.

Accordingly, the focus has to be on the net assets and balance sheet position of DREL as it currently stands and as it would be if the merger proceeds. In relation to that Ms Crook in a witness statement dated 3^rd December 2012 explains how the balance sheet and net assets position of DREL has been significantly improved beyond what it was in the statutory accounts of that company as at 31^st December 2011. At that time there was a significant deficit on the net assets figure of some £41 million. Since then there have been a series of capital injections into DREL as set out in its updated balance sheet restated for major capital structure changes in 2012, put before me as exhibit SC18 to Ms Crooks’ witness statement.

I am satisfied, having been taken through her evidence in relation to the entries on that restated balance sheet in detail and tested the merits of the figures appearing in it in debate with Mr Thornton, that that restated balance sheet represents a fair and appropriate basis on which to make the assessment required under regulation 16 of the 2007 Regulations. According to that restated balance sheet, as a result of the various transactions undertaken to improve the capital position of DREL, what was previously a negative net asset position is now a positive net asset position of the order of £7.759 million. In addition to that, Mr Thornton has explained that of the 14 Spanish companies to be absorbed into DREL by this merger, 13 are solvent companies, whilst the fourteenth company is balance sheet insolvent with a negative net asset position of only about minus 172,000 Euros. The positive net asset figures of the other 13 companies far exceeds that amount. Therefore, taking the group of 14 companies as a whole, there will be a significant overall further improvement to the net asset position of DREL if the 14 mergers are approved.

I am satisfied on the basis of this evidence that there will not be a significant material detriment to the creditors of the merging Spanish companies nor to the shareholders, employees and creditors of DREL itself, whose directors wish the transaction to proceed. There are no specific employee arrangements in relation to the merging companies which require further or additional consideration. In these circumstances, I am satisfied that the proposed merger does not adversely affect any stakeholder in the merging companies in any material way. I am also satisfied that there is no other good reason to refuse to approve the proposed merger. Therefore, I approve the proposed merger and make the order required to give it effect under regulation 16 of the 2007 Regulations.