Olympus UK Ltd & Ors

These applications under Regulations 11 and 13 of the Companies (Cross-Border Mergers) Regulations 2007 (“the CCBMR 2007” or “the Regulations”) raise an important legal issue concerning the construction of the CCBMR 2007 and Directive 2005/56/EC on cross-border mergers of limited liability companies (the “Directive”). This issue is fundamental to the proposed mergers in this case and is (so I am told) of general market interest.

The issue is whether a proposed cross-border merger would be compliant with, and effective under, the CCBMR 2007 in circumstances where the shareholders in the transferor company have agreed not to receive shares or other securities in the transferee.

This issue arises because, at least on one reading, the CCBMR 2007 contemplate that in a cross-border merger (other than a merger by absorption of a wholly-owned subsidiary), shareholders in the transferor company will actually receive, as consideration for the merger, “shares or other securities representing the capital of the transferee company”: see Regulations 2(2)(f) and 2(4)(c). In the present case, and in light of the fact that all the companies concerned are (albeit indirectly) wholly-owned by the same ultimate holding company (Olympus Corporation, a Japanese body corporate), the draft terms of merger provide that the shareholders in the Applicant transferor companies will not receive any consideration from the transferee companies.

It is because such a point of principle is raised that the matter was (entirely correctly, in my view) listed before a Judge, rather than before a Registrar: and see per David Richards J in Re Oceanrose Investments Ltd [2008] EWHC 3475 as to the procedure under the Regulations (paragraphs 5 and 6 of that judgment), the usual practice of the Companies Court (paragraph 7) and the circumstances in which, exceptionally, it is appropriate that the matter is brought before a judge (paragraph 10).

I have not found the issue straightforward. There are differences between the CCBMR 2007 and the Directive in the manner in which the same concepts and objectives are expressed; and some of the words and expressions used in the Directive would bear specialised but well-established meanings in English company law which, it seems to me, were not intended. The search for an autonomous meaning has necessitated two further rounds of expert evidence, and additional hearings. I have not had the benefit of adversarial argument, though Mr Ben Shaw, Counsel for the Applicants, has sought to identify contrary arguments and has given me considerable assistance (for which I am most grateful).

In the end, after not a little wavering, my conclusion is that the transactions in question are operations that comply with the CCBMR 2007 and the Directive and qualify as mergers by absorption. In light of that conclusion, on 15 April 2014 I made the directions which were sought by the applications. I now set out below my approach and reasoning at some length in light of the interest which I understand there is in the issue and the research and assistance provided to me.

The CCBMR 2007 (which came into force on 15 December 2007) are designed and intended to give effect to the Directive in this jurisdiction.

The Regulations provide for and enable three specific types of cross-border merger, in each case where a UK company is involved in a merger with one or more EEA bodies corporate: (1) a “merger by absorption”, (2) a “merger by absorption of a wholly-owned subsidiary” and (3) a merger by formation of a new company.

It is the first type of merger (“merger by absorption”) that is of particular relevance in this case, even though some of the principles engaged may have a broader application.

Regulation 2(2) of the CCBMR 2007 defines the meaning (for the purposes of the CCBMR 2007) of the three types of “cross-border merger” identified in Regulation 2(1) as follows:

“(2)

In these regulations “merger by absorption” means an operation in which –

(a)

there are one or more transferor companies;

(b)

there is an existing transferee company;

(c)

at least one of these companies is a UK company;

(d)

at least one of these companies is an EEA company;

(e)

every transferor company is dissolved without going into liquidation, and on its dissolution transfers all its assets and liabilities to the transferee company; and

(f)

the consideration of the transfer is –

(i)

shares or other securities representing the capital of the transferee company, and

(ii)

if so agreed, a cash payment,

receivable by members of the transferor company.

(3)

In these Regulations “merger by absorption of a wholly-owned subsidiary” means 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;

(b)

either the transferor company or the transferee company is a UK company;

(c)

either the transferor company or the transferee company is an EEA company; and

(d)

the transferor company is dissolved without going into liquidation, and on its dissolution transfers all its assets and liabilities to the transferee company.

(4)

In these Regulations “merger by formation of a new company” means an operation in which –

(a)

there are two or more transferor companies, at least two of which are each governed by the law of a different EEA State;

(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;

(c)

the consideration for the transfer is –

(i)

shares or other securities representing the capital of the transferee company, and

(ii)

if so agreed, a cash payment,

receivable by members of the transferor company;

(d)

at least one of the transferor companies of the transferee companies is a UK company.”

That definition is intended to reflect and implement the definition of “merger” in Article 2(2) of the Directive. It is there provided that for the purposes of the Directive a:

“‘merger’ means an operation whereby:

“(a)

one or more companies, on being dissolved without going into liquidation, transfer all of their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares; 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, in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10% of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities or shares; and

(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.”

Only Regulation 2(2) of the CCBMR 2007 and Article 2(2)(a) of the Directive are engaged in the present case, though Regulation 2(3) and (4) of the CCBMR 2007 and Article 2(2)(b) and (c) of the Directive may of some relevance to the process of interpretation.

The Directive was introduced to permit, standardise, simplify, and ensure the effectiveness of cross-border mergers between companies governed by the laws of different Member States within the European Union. The Explanatory Memorandum presented by the Commission of the European Communities in November 2003 in support of a proposal ultimately implemented in the form of the Directive identified its purpose as being

“…to fill a significant gap in company law left by the need to facilitate cross-border mergers of commercial companies without the national law governing them – as a rule the laws of the countries where their head offices are situated – forming an obstacle.”

That Explanatory Memorandum also states that

“the definitions of merger by acquisition and merger by formation of a new company are taken from Directive 90/434/EEC…and are in keeping with those in Directive 78/855/EEC concerning domestic mergers of public limited liability companies.”

The Directive applies 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).”

The CCBMR 2007 are intended to implement the Directive in the United Kingdom and (to quote the Explanatory Note which is now customary) “to provide a framework whereby companies may engage in a cross-border merger.” They came into force on 15 December 2007.

The scheme of the Directive and the CCBMR 2007 is relatively simple (except as regards a difficult and fraught issue of employee representation on the board of the resulting merger company, which is made the more intractable because of differing views within the EU on the principle of such representation, but which does not (as I understand it) arise in the present case). The terms of the merger are left largely to the companies concerned; by contrast the procedure is prescriptive.

Each company in the cross-border merger is subject to its national merger procedure on the basis of a common merger plan. This plan must, however, comply with prescribed standards set out in Council Directive 78/855/EEC (“the Third Directive”) and be the subject of reports by the directors of each merging company and (except in the case of a simplified procedure available in the context of the absorption of wholly-owned subsidiaries or where every member of every merging company agrees otherwise) by an independent expert.

A two-stage review process is stipulated. In the case of the CCBMR 2007, at the first ‘pre-merger’ stage (and mirroring the domestic regime in Part 27 of the Companies Act 2006), and after circulation to the shareholders of the draft terms of merger, a directors’ report and an independent expert’s report (which must also be made available for inspection in the manner prescribed), the UK company must apply to the court for it to convene meetings of shareholders (or classes of shareholders) and in some cases, meetings of creditors (or classes of creditors) to approve the merger. (This is the present stage of these applications.)

In each of the jurisdictions where the merging companies are registered, the company registries have certain prescribed registration functions. In the UK, not less than two months before the date of the first meeting to approve the merger, the directors must deliver to the registrar of companies a copy of any court order convening the meeting(s), a copy of the draft terms of merger and certain prescribed particulars in respect of each merging company. The registrar of companies must publish details of the merger and the meeting(s) in the Gazette at least one month before the date of the first meeting.

After gaining the necessary shareholder and creditor approvals each merging company may apply to its relevant national ‘competent authority’ for an order certifying completion of the pre-merger requirements. In the UK, the courts are the competent authority: but in some other EU countries the competent authority is a notary or a clerk, with important responsibilities but not a judicial function.

Subject to the issue of that “pre-merger certificate” by the designated national authority, the merger is then considered by the appropriate ‘competent authority’ in the State where the resulting company is to be registered. This is the second ‘merger completion’ stage. If that ‘competent authority’ is satisfied that the relevant requirements have been met it will approve the merger and fix a date when the merger takes place (being a date not less than 21 days after the order approving the merger).

Following approval, a UK transferor company must deliver to the registrar of companies, within seven days of the court order, a copy of such order; and where there is a transferor company that is an EEA body corporate, details must be delivered also of the register in which such body corporate is registered and its registration number. If the approval is given by the ‘competent authority’ of another EEA state, every UK transferor company must deliver a copy of the order to the registrar of companies within 14 days of its date. Certain information must also be provided if the UK company has amended its articles or if an order is made which affects its constitution in some way.

On the date fixed, all the assets and liabilities of the transferor companies are transferred to the transferee company by operation of law; and the members of the transferor companies receive the consideration payable and, in right of the share element of that consideration, become members of the transferee company. (There is an exception if the transferee company is already a member of the transferor company, as provided in Article 14(5) and acknowledged in Regulation 17(1)(d)). The transferor companies then cease to exist.

There are, as indicated above, specific further provisions if a merger involves employee participation arrangements in one or more of the merging companies. It is not necessary to consider these here.

As to the consideration for the assets and liabilities transferred, it will have been seen that Article 2 of the Directive prescribes that the cash element shall not exceed 10% of the nominal value: but Article 3 provides that Member States may allow the cash element to exceed that (as indeed is permitted by the UK, further to a consultation process by the DTI in 2007).

Article 5 of the Directive, which is reflected in Regulation 7 of the CCBMR 2007, prescribes the particulars to be given in the common merger plan. These include “the share exchange ratio” (to quote Regulation 7(2)(b) or “the ratio applicable to the exchange of securities or shares” (to quote Article 5(b) of the Directive).

Article 17 of the Directive provides that “a cross-border merger which has taken effect…may not be declared null and void”.

As set out in Mr Shaw’s skeleton argument provided in respect of the applications, the proposed mergers may be summarised as follows.

The ultimate parent company of all merging entities involved in the two proposed cross-border mergers is the Olympus Corporation, based in Tokyo. The Olympus group’s principal activities comprise the manufacture and sale of healthcare and consumer electronic goods.

Olympus UK (Holding) Limited (“OUKH”) and Olympus UK Limited (“OUK”) are both companies incorporated in England. OUK is a wholly-owned subsidiary of OUKH. The sole shareholder in OUKH is a German limited partnership known as Olympus Europe SE & Co KG (“OE KG”). As explained in the witness statement of Sara Bandehzadeh, a partner in the firm of solicitors instructed by the Applicants in this jurisdiction but who is qualified to practise in Germany, at paragraph 12, as a limited partnership, OE KG has a separate legal personality as a matter of German law.

Under the first of the proposed cross-border mergers, OUKH and OUK will merge with a German company known as Olympus Europa Property Management GmbH (“OEPM”). The form of this merger will be a “merger by absorption” under which the assets and liabilities of OUKH and OUK will be transferred, by operation of law, to OEPM and OUKH and OUK will be dissolved without going into liquidation.

The draft terms of merger in respect of the proposed merger between OUKH, OUK and OEPM provide that OEPM (defined as the “Transferee”) will not allot shares to the holders of shares in OUKH and OUK (defined as “Transferor 1” and “Transferor 2”, respectively). Paragraphs 2.1 to 2.4 and 3 of those draft terms provide as follows:

“2

Merger, share exchange ratio and cash payment

2.1

Each of the Transferor 1 and the Transferor 2 shall transfer all its assets and liabilities to the Transferee by way of merger by absorption pursuant to Sections 122a et seq. German Transformation Act and Regulation 2(2) et seq. of the Companies (Cross Border Mergers) Regulations 2007 (the “Merger”).

2.2

Pursuant to Sections 122a(1), 54(1) of German Transformation Act the Transferee is exempt from increasing its share capital because Transferor 2 as sole shareholder of Transferor 1 and Olympus Europa SE & Co KG as sole shareholder of Transferor 2 waive their entitlement to receive shares or other consideration for the Merger as they and the Transferee are all under common ownership of Olympus Corporation as part of the Group and deem the merger beneficial to the Group as a whole.

2.3

No shares or other securities shall be allotted by the Transferee to the holders of shares or other securities in the Transferor 1 or the Transferor 2.

2.4

No cash payments shall be made by the Transferee to the Transferor 2 or the holders of shares or other securities of the Transferor 1 or the Transferor 2.

Olympus Newco Limited (“ONL”) is a company incorporated in England. Its sole shareholder is a Societas Europaea (“SE”) registered in England and known as Olympus Europa Holding SE (“OEHSE”).

It is proposed that ONL participate in a cross-border merger by absorption under which the assets and liabilities of ONL will be transferred, by operation of law, to another SE registered in Germany and known as Olympus Europa Management SE (“OEMSE”) and ONL will be dissolved without going into liquidation. OEHSE is the sole shareholder in OEMSE.

Paragraphs 2.1 to 2.4 and 3 of the draft terms of merger in respect of the proposed merger between ONL and OEMSE provide as follows:

“2

Merger, share exchange ratio and cash payment

2.1

The Transferor shall transfer all its assets and liabilities to the Transferee by way of merger by absorption pursuant to Sections 122a et seq. German Transformation Act and Regulation 2(2) et seq. of the Companies (Cross Border Mergers) Regulations 2007 (the “Merger”).

2.2

Pursuant to Sections 122a(1), 54(1) of German Transformation Act OEHSE, being the sole shareholder of the Transferor, waives its entitlement to receive shares or other consideration for the Merger. Both the Transferor and Transferee are under common ownership with the same ultimate parent company, Olympus Corporation. As such the consideration is waived by OEHSE as completion of the Merger would benefit the Group as a whole.

2.3

No shares or other securities shall be allotted by the Transferee to the holders of shares or other securities in the Transferor.

2.4

No cash payments shall be made by the Transferee to the Transferor or the holders of shares or other securities in the Transferor.

Thus, as previously foreshadowed, the draft terms of merger provide that the two German transferee companies (OEMSE and OEPM) are not obliged to issue shares to shareholders in the transferor companies on the grounds that such shareholders have waived their right to receive consideration. These draft terms of merger appear to have been drafted by reference to German law.

A further point to be noted is that the resulting company is an SE. By way of clarification, and again adopting the Applicants’ skeleton argument, an SE is a form of company which was introduced into European law by Council Regulation EC No. 2157/2001 (the “SE Regulation”). An SE is formed under the SE Regulation and registered in a Member State. Under Article 8 of the SE Regulation, an SE may move its registration from one Member State to another. Under Article 11, in respect of any matters not covered by the SE Regulation, an SE is treated as a public limited company incorporated under the laws of the Member State in which it is registered. Accordingly, in the present case, in respect of any matters not governed by the SE Regulation, OEMSE and OEHSE are treated as public limited companies formed under German and English law, respectively.

A cross-border merger between an English company and an SE registered in another Member State is within the scope of the CCBMR 2007. In particular, under Regulation 2(2)(d), a “merger by absorption” is defined as an operation in which at least one of the merging companies is “an EEA company”. An “EEA company” is defined in Regulation 3 as “a body corporate governed by the law of an EEA State other than the United Kingdom”. An SE is a form of body corporate so governed.

The shape of the merger documentation appears to have been determined by German law. I have been provided with evidence of that law by Ms Sara Bandehzadeh and by Professor Dr Norbert Zimmermann (“Professor Zimmermann”), an independent expert who is a civil law notary and an Honorary Professor of Law at the Heinrich-Heine University of Dusseldorf, teaching corporate law).

It is their evidence that under German domestic merger law pre-dating the Directive it was and remains expressly provided that the shareholders in a transferor company may waive their rights to receive consideration: under sections 54(1) and 68(1) of the German Transformation Act (“the GTA”), a transferee company is not obliged to issue shares if shareholders in the transferor have waived their right.

Further, according to the evidence of Professor Zimmermann (amplified at my request):

This German perspective is both relevant and helpful; and it has plainly informed the approach of the Applicants. But whatever the position in Germany, I must consider whether the transactions proposed satisfy the conditions of the CCBMR 2007 in this jurisdiction.

In doing so, I must interpret and apply the relevant definitions of ‘cross-border merger’ in Regulation 2 of the CCBMR 2007. As to that:

“the national court’s obligation is to interpret domestic legislation, so far as possible, in the light of the wording and the purpose of a directive in order to achieve the result pursued by the directive and thereby comply with Community obligations”

(see Marleasing SA v La Comercial Internacional de Alimentacion SA Case C-106/89 [1990] ECR 1-4135 and The Commissioners for HMRC v IDT Card Services Ireland Ltd [2006] EWCA Civ 29 at [79]).

In such circumstances, and although the provisions ultimately to be interpreted are the implementing Regulations (here, the CCBMR 2007), the starting point is usually the Directive (see per Henderson J in Re Itaú BBA International Ltd [2012] EWHC 1783 (Ch); [2013] BCC 225, at paragraph 24) since the interpretation to be given to the Regulations must, if possible, conform with the Directive and with any autonomous meaning ascribed to words or concepts for the purposes of European law.

Usually because the language of a Directive tends to be more open-textured or less precise than the implementing Regulations, the question is more often than not whether apparently more restrictive Regulations may be given, by a process of purposive interpretation by reference to the Directive, a more facilitative meaning than their language might at first blush suggest. In this case, however, one of the curiosities is that the language of the Directive appears more prescriptive and restrictive than that in the CCBMR 2007. Since that might point to a restrictive interpretation of the CCBMR 2007, I think that the most illuminating starting point is the Directive.

As is well known, the approach of the ECJ/CJEU to interpretation is teleological: the search is for an interpretation that gives effect to the objectives of the Directive. These include (a) uniformity in the application of EU law (b) “effectiveness” or “effet utile” and (c) the achievement of the aims of the Directive, as expressed in its recitals, being to enable, facilitate and reduce the complexity of cross-border mergers.

Thus, literal meaning may have to yield to a teleological or purposive approach: see again Re Itaú at paragraph 5. Even if the wording in EU legislation may, as a matter of purely semantic analysis, seem clear, it is still necessary to refer to the spirit, general scheme and the context of the provision or the practicalities of its operation: see Vaughan and Robertson, ‘Law of the European Union’ at 3[81]; and Gebrueder Knauf Westdeutsche Gipswerke v Hauptzollamt Hamburg-Jonas [1980] ECR 1183 at para 5.

Further, the text of a provision of EU legislation comprises all authentic versions expressed in the official EU languages: preference is not to be given to any one version, and the search is for a meaning best consonant with all the versions: see Vaughan and Robertson, ‘Law of the European Union’ at 3[82]; and Jany and Others v Staatssecretaris van Justitie [2001] ECR 1-8615 at para 47. Care must be taken to identify an autonomous meaning where appropriate, rather than any specific domestic meaning.

In terms of the words of the definition in Article 2(2)(a) of the Directive of what in this jurisdiction is known as a merger by absorption, there is no doubt that a necessary or qualifying characteristic of such a ‘merger’ is expressly stated to be an “exchange for the issue to members” of the transferor company of “securities or shares representing the capital of” the transferee company. There is no express provision for waiver of the right to be issued such shares.

To the English company lawyer’s eye, ‘merger’ is a word usually given a restrictive meaning and the words “issue to members of shares” denote that the members of the transferor company must actually be registered in respect of the consideration shares (for that is what, at least according to English company law, ‘issue’ ordinarily means) in exchange (that is what is stated) for the transfer to the transferee. As a matter of English company law, shares are only “issued” when the allottee is entered in the company’s register of members in respect of the new shares for which he has subscribed: National Westminster Bank plc v Inland Revenue Commissioners [1995] 1 AC 119.

Taken together with the further requirements that there must be an “operation” (which appears to me naturally to prescribe that the requisite ‘issue’ in ‘exchange’ must indeed ‘operate’) and an “exchange” (connoting consideration moving both ways), it seemed to me, initially at least, that the criteria stipulated to qualify a transaction as a merger simply could not be met.

However, having regard to the approach apparently adopted in the German law, I was concerned on reflection that this was too narrow a field of vision, and that I was seeing only what was revealed using the specialist spectacles of English company law. Adherence only to (a) the English language version and (b) some specialised meaning in English company law of the English words deployed may well result in inconsistency with the true intent of the Directive as expressed in other languages or having regard to other meanings of a word or phrase in analogous contexts in other jurisdictions.

Further, it seemed to me that the definition of “merger” in Article 2(2) of the Directive should be treated as autonomous: Member States were not given the freedom to define a “merger” by reference to their national laws. On that basis, the real question is not what an “issue… of securities or shares” would mean as a matter of English company law but, instead, what this term means in a European context.

It was for this reason that, further to the main hearing of this matter, I permitted the Applicants an opportunity (indeed two opportunities) to supplement the evidence in support of the applications with a view to determining both (a) whether the words of concern (and especially the word “issue”) appeared in the texts of the Directive in other languages and also (b) whether some and if so what autonomous meaning should be given to that word and the provision as a whole so as to reconcile as far as possible any differences in language, and (more generally) achieve the purpose and objectives of the Directive.

Under some considerable pressure of time (given the relatively long lead-time required under the two-stage process that I have sought to outline above) the Applicants have assembled supplementary evidence of the German and French language texts of the relevant provisions in the Directive, and as to what meaning would be likely to be attributed in various jurisdictions to certain of the key words (especially the words of which the English translation is “issue of shares”).

Not all of what has latterly been provided to me satisfies the description of truly independent expert evidence. The first round of supplemental evidence consisted of email exchanges from partners in relevant foreign offices of the solicitors firm advising the Applicants. Although of some assistance in explaining the approach in various jurisdictions and the semantic meanings of the words in the language in question, it also opened up further uncertainties, especially as regards the position under French law.

In these circumstances, and although I indicated that I could take some account of parts of the first round of supplemental evidence (insofar as it focused on the semantic meaning of the words in the language in question, rather than the legal interpretation of the provisions) Counsel for the Applicants (wisely, to my mind) asked for further time in which to put before the court further independent expert evidence, especially on the French law.

I can summarise the results of the supplemental evidence provided (including the first round of supplemental evidence) as follows:

In his supplemental submissions, Mr Shaw has made the point that the definition of “merger” in Article 2(2) of the Directive does not only refer to an issue of shares. Instead, it refers to an “issue… of securities or shares representing the capital of [the transferee]” (emphasis supplied). While a company is under a statutory duty to maintain a register of members, it is not required to maintain a register of other forms of “securities”, such as options or warrants. He submits that it cannot be the case, therefore, that the use of the word “issue” in Article 2(2) of the Directive means that members of the transferor must be entered in the register of members of the transferee: it must be accorded a less restrictive and less technical meaning.

Although not conclusive, these researches and further submissions do seem to me to indicate that the relevant provisions in the Directive should be given a broader meaning than I was initially disposed to accord them. I have not been provided with, and have not considered, the Directive in all its authentic versions expressed in official EU languages. However, the flexibility in terms of what is required to be made available to the shareholders of the transferor(s), which appears to be offered by the German and French versions of the Directive, suffices to justify, in my view, taking as the autonomous meaning of the word ‘issue’ a less precise and restrictive meaning extending to grant, allocation or allotment, without also stipulating receipt and registration. In that context, I note and adopt the view expressed in Vaughan and Robertson at 3[82] that:

“Where the different language versions of a decision addressed to all the Member States diverge, the most liberal interpretation consonant with the objectives of the decision must prevail, because it cannot be accepted that the draftsman of the decision intended to impose stricter obligations in some Member States than in others.”

All in all, I am satisfied that, although the Applicants have neither uncovered nor offered any linguistic variation or autonomous meaning in respect of the other words that caused me concerns (“operation” and “exchange”), it would not be right to read the definitions of cross-border merger in the Directive as requiring an “issue of shares” in the strict sense of that word in English company law; and that all that is required is that the rights of members of the transferor company, in the case of a merger by absorption, to be offered shares in exchange should be recognised, even if those rights are simultaneously declined by all the members.

It follows from that that the lack of an express right of waiver does not mean that the right to shares may not be waived: for the right is implicit in it being sufficient, in effect, that the right to the shares is recognised, even though it is declined.

Having thus satisfied myself as to the flexibility available under the Directive, I turn to the words of the CCBMR 2007, which are of course, the words that ultimately fall to be interpreted.

Once again adopting the more open textured and purposive approach which is required in a context such as this, it seems to me that the same flexibility may be read into the relevant provisions of the CCBMR 2007.

Put shortly, in my judgment, the CCBMR 2007, in defining “merger by absorption” and “merger by formation of a new company” in Regulation 2(2) and (4) respectively, state that the consideration is to be “receivable by members of the transferor company”. These words are open to different interpretations; but they do appear to me to be capable of enabling a waiver of the right to consideration without compromising the characteristic of the transaction as a cross-border merger.

The words comprise, to my mind, an odd formulation, which admits of the possibility that consideration though receivable does not have to be received (or, put in terms of shares, issued to the relevant member of the transferor company). The very oddness of the formulation appears to me to signify that it was intentional; and that the intention behind the words may have indeed been to leave open the possibility of a waiver, such as is permitted under German law.

In reaching these conclusions I have also drawn support from the following considerations.

First, such an approach is obviously attractive in circumstances where (as here) a literal approach results in what might be thought of as a triumph of form over substance. As Mr Shaw pressed upon me, nothing in the Directive requires the transferee to pay any minimum level of consideration to shareholders in the transferor. Moreover, there is no requirement that shareholders in the transferor should enjoy any minimum level of participation in the transferee. The commercial terms of a merger are a matter for negotiation between the merging companies. In such circumstances, the literal requirements of exchange and issue could presumably be met by the issue of virtually worthless shares to no material economic advantage in themselves and providing to the transferor’s shareholders no materially increased interest or equity participation in the resulting (transferee) company (which is already owned and controlled by their indirect holding company). Such a result is difficult to regard as an “effet utile” and correspondingly easy to regard as a formalistic complexity which should not be allowed to reduce the efficiency of the overall provisions.

Such a formalistic negative result would be especially unfortunate, given that (so I understand) the vast majority of cross-border mergers are not arm’s-length transactions but are, instead, undertaken as part of intra-group restructuring for the purpose of simplifying pan-European group structures. To require a token share or other security to be issued as part of a cross-border merger would be likely to lead to unnecessary cross-shareholdings in an intra-group context, to no good effect.

I think it also permissible to bear in mind that the Directive does in many ways reflect the German model in the GTA (which, of course, pre-dated it); and that in other EU States, as well as Germany, provision has been made for waiver of consideration in specified circumstances (though these do vary between States). Thus, I understand from material hastily assembled and exhibited to a further witness statement on behalf of the Applicants (which, as with the further evidence provided thereafter, may not qualify as expert evidence but of which I think I can take note since the legislation speaks, albeit in translation, for itself) that Austrian legislation also provides for waiver as in the case of Germany.

Mr Shaw also submitted that a flexible interpretation such as I have eventually been persuaded of is not only commercially sensible but also necessary in order to give effect to the fundamental freedoms and principles of the Treaties of the EU including, in particular, the freedom of establishment enshrined in Article 49 of the Treaty on the Functioning of the European Union (as amended by the 2007 Treaty of Lisbon) (“TFEU”).

TFEU Article 49 provides:-

“Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.”

Article 54 TFEU provides that companies are to be treated in the same way as natural persons:-

“Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States…”

The fundamental freedom of establishment granted under Article 49 TFEU therefore extends to companies as well as natural persons.

EU case law emphasises the importance of the principle of freedom of establishment and the role played by cross-border mergers in the exercise of this freedom. Thus, for example, SEVIC Systems AG [2005] ECR 1-10805 C-411/03 involved a challenge to German merger legislation (the GTA) in the form in which it applied before it was amended so as to implement the Directive. In that case, a cross-border merger by absorption was proposed between a Luxembourg transferor and a German transferee. The merger was refused registration in Germany, because the GTA only applied to mergers between German companies. The ECJ considered whether this refusal infringed the fundamental freedom of establishment enshrined in the EC Treaty. The ECJ held as follows at paras 18-19 of its judgment:-

The Applicants submitted on this basis that, in the present case, a requirement under the CCBMR 2007 that securities or shares in the capital of the transferee be issued to members of the transferor, even in circumstances where such members do not want securities or shares, would constitute a disproportionate restriction on the freedom of establishment under TFEU Article 49.

However, Mr Shaw very properly drew my attention to the ECJ’s subsequent decision in Cartesio C-210/06 [2009] Ch 354, in which the ECJ adopted a relatively narrow interpretation of its decision in SEVIC Systems: see paras 109-124 of the judgment. He submitted that Cartesio was not concerned with a cross-border merger, and that nothing in the ECJ’s judgment in Cartesio undermines the importance of the freedom of establishment or the relevance of cross-border mergers as a mechanism for giving effect to this freedom. But he accepted that some commentators have suggested that Cartesio does indicate a less expansive view of the freedom of establishment.

Without the benefit of contrary argument, I do not think it either necessary or appropriate to reach a concluded view on this additional argument; suffice it to say that it may further support the conclusion I have reached.

For completeness, I have also considered the following counter-indications or counter-arguments:

In short, though I do not dismiss these counter-indications or counter-arguments lightly, in the end, I do not consider them, either singly or in the round, such as to compel the conclusion that the inclusion of a provision for waiver of any share consideration otherwise payable is inconsistent with the transaction qualifying as a ‘cross-border merger’ in the circumstances of this case (where all the companies are wholly-owned subsidiaries within a group structure).

In conclusion, for these reasons, I have been persuaded that the proposed operations do constitute cross-border mergers within the meaning of the CCBMR 2007 and the Directive notwithstanding the provisions for the shareholders of the Transferor Companies to waive their entitlement to any shares or cash in exchange.

As will be apparent, especially from sub-paragraph (3) of paragraph 79 above, I have placed some reliance on the fact of the wholly-owned group structure. It is not necessary for me to decide whether the same result would follow in other contexts, and I do not do so.

Lastly, whilst I have reached my conclusion after careful and anxious consideration, and having sought to take into account possible counter-arguments, the fact remains that I have not had the benefit of adversarial argument; and though on the facts of this case I shall make the appropriate directions, and I hope that this analysis may be of some assistance to the market, it is obviously subject to that important caveat.