Honda Motor Europe Ltd, Re

Honda Motor Europe Limited (“Honda Europe”) is an English company which is wholly owned subsidiary of the Honda Motor Company Limited, a Japanese company.

Honda Europe has in recent years undertaken a wide-ranging in reorganisation of its car businesses in Europe, in part by merging sales subsidiaries. It is now undertaking the same exercise in relation to its motor cycle businesses.

Montesa SA (“Montesa”) is a private limited company incorporated in Spain. It has two aspects to its business:

It is now considered that the distribution and sales business of Montesa would more efficiently be carried out by Honda Europe, whilst the manufacturing business remains with Montesa. To achieve this split it proposed to de-merge the sales business into a separate subsidiary (“Newco”) and then to undertake a cross-border merger between Newco and Honda Europe. In order to avoid Newco having to undertake trading (with all of the commercial, organisational, fiscal and regulatory consequences that would follow) it is proposed that the cross-border merger should become effective a scintilla of time after the completion of the de-merger.

Spanish law places two obstacles in the way of achieving that objective. First, under Spanish law a Deed of De-Merger is only effective when registered at the Spanish Commercial Registry. Second, once an application is made to the Spanish Commercial Registry for a pre-merger certificate under the cross-border merger process, no further application may be made. The combined effect of these rules is that the de-merger would have to be completed and be effective before an application for a pre-merger certificate could be made, and Newco would have to trade the demerged business whilst the pre-merger certification process was undertaken and cross-border merger approval was obtained.

Honda Europe proposes to de-merge the Montesa sales business to an Italian Newco, because those difficulties do not arise in Italy: and then to undertake a merger by absorption of the wholly owned Italian Newco.

The first step in that process is to obtain from this Court an order for the convening of a meeting of Honda Europe’s sole shareholder under regulation 11 of the Companies (Cross-Border Mergers) Regulations 2007. The process will conclude with the hearing at which the Court will consider sanctioning the merger in accordance with the principles identified by Sales J in Re Diamond Resorts (Europe) Limited [2012] EWHC 3576 (Ch). If sanctioned the cross-border merger will take effect on a specified date at least 21 days after the date of the sanction order (“the Effective Date”).

If the present proposals for the reorganisation of Montesa’s business are put into effect then as at the date of the hearing to sanction the cross-border merger between Honda Europe and Italian Newco:

Honda Europe do not wish to seek an order convening a shareholder meeting if it is clear even at this stage that sanction cannot be obtained because Italian Newco is a mere conduit for part of Montesa’s business and that seeking sanction in such circumstances would be abusive of the process of the Court.

It is clear that the present application is not deliberately abusive of the Court’s process in the sense that Honda Europe is manipulating the Court process to avoid something which the Cross-Border Merger Regulations require. There is a plain commercial justification for the present proposals arising out of the organisational and regulatory context of the sales business of Montesa.

Whether the Court will sanction the cross-border merger must be a matter for the judge at the sanction hearing: and nothing I say at this state can fetter that judge’s ultimate decision. But it seems to me perfectly possible so to frame the terms of the de-merger agreement that the Court conducting the sanction hearing is enabled (if it so desires) to look at the reality of the transaction and then consider the interests of the stakeholders in the transferring sales business (taking a broad view of who are the relevant stakeholders in Italian Newco). The Court cannot say at present that if the proposed scheme is put into effect then sanction must inevitably be withheld.

Mr Thornton drew my attention to two cases in which similar difficulties had been addressed. The first was the decision of Brightman J in Rylands – Whitecross Limited (21^stDecember 1973, unreported). Shareholder A had agreed to sell its entire holding of 400,000 shares to Shareholder B. Instead of executing a share transfer (which would have attracted ad-valorem stamp duty) it was proposed that the company should reduce its share capital by cancelling the 400,000 shares held by Shareholder A, that Shareholder B should pay £400,000 to Shareholder A as the price of its consenting to the proposal, and that the credit of £400,000 in the books of the company available in consequence of the cancellation of the 400,000 shares should be applied in paying for 400,000 shares to be issued to Shareholder B. The court was asked to confirm a reduction of capital intended to endure for a purely nominal period of time for the sole purpose of implementing this pre-arranged sale (which the parties could have achieved for themselves without any assistance from the court). Brightman J held that it was a misuse of the time of the Registrar of the Companies Court and of its Officers, a misuse of the time of the court and misuse of the provisions of the Companies Act dealing with reductions of capital. He held that if the parties could implement a sale for themselves then the Companies Court should not be asked to do it for them. I do not think that this principle is infringed. Honda Europe is, for reasons which appear proper and genuine, seeking to reorganise its business in the manner that inevitably involves cross-border mergers. The Regulations require that the Court be involved, and the Court itself has held that that involvement entails an examination of the proposed merger with the view to being satisfied that it does not adversely affect any stakeholder in any of the merging companies. Since it cannot today be said that it will be impossible for the Court properly to exercise that jurisdiction at the sanctions hearing it is not a waste of the Court’s time to embark on the process.

The second case was Re Tip-Europe Limited [1988] BCLC 231. A company resolved that subject to the creation and allotment of 15m “B preference shares” its share premium account should be reduced by some £13m. So, if the allotment were made then the share premium account was to be reduced. The issue was whether the court could sanction a conditional reduction of capital i.e. a resolution which remained conditional at the time when the Court’s confirmation was sought. It was held that the Court could confirm the reduction of capital provided that the condition had been fulfilled by the time the court came to confirm the reduction.

It does not seem to me that this principle (insofar as it may be applicable to the giving of sanction under the 2007 Regulations, a matter that was not the subject of argument) presents an insuperable obstacle. There will be a merger between Honda Europe and Italian Newco whether the de-merger of Montesa’s sales business proceeds or not: if the de-merger of Montesa’s sales business does proceed then it is intended that there should be no commercial conditions outstanding as at the date of the sanction hearing. One cannot be sure that that will be so: but equally one cannot be sure that it will not be so and that a judge exercising the sanction jurisdiction would be bound inevitably to conclude that there were unsatisfied conditions which made the grant of sanction impossible.

Since it cannot today be said that the grant of an order to convene the shareholders meeting will commence a process that will waste the time of the court and inevitably result in withholding of sanction (having regard to the intended form of the transaction) I granted the order sought.