Easynet Global Services Ltd, Re

I have before me an application by Easynet Global Services Ltd (“the Company”) for permission under Regulation 11 of the Companies (Cross-Border Mergers) Regulations 2007 to convene a meeting of its sole shareholder. This is intended to be the first step in a series of procedural steps under the Cross-Border Mergers Regulations whereby 22 companies will be merged in to the Company. I will refer to what is proposed to be done as the transaction. All the companies are members of the same group but there is more to the group as a whole than just the companies involved in this transaction.

Ordinarily an application of this kind would be before the Registrar of the Companies Court but it has been made to a judge because the applicant is seeking confirmation:

Bringing an application of this type to the court at this stage is clearly a sensible thing to do in order for the Company to find out whether there are any difficulties in the transaction which it intends to enter in to before it starts incurring significant cost.

Before me Mr Horan instructed by Bird & Bird LLP appears for the Company and has ably represented his client to explain the issues to be decided and why orders should be made in his client’s favour. There is no opponent. Following the hearing, and with my permission, Mr Horan made further submissions in writing having regard to the concerns I had raised. I have taken them into account.

The existing corporate structure bears some explanation although the precise details do not matter. There is a company called Interoute Communications Ltd which holds as a subsidiary MDNX Group Holdings Ltd. That company in turn holds ten companies, nine of which are UK companies and the tenth, Interoute Capital Markets BV, is a Dutch company. I will refer to this Dutch company as BV. One of the companies owned by MDNX Group Holdings Ltd is the applicant, i.e. the Company. Another of the ten companies is Easynet Ltd which in turn owns four foreign companies from China, Hong Kong, USA and Switzerland. Those four foreign companies are not to participate directly in the proposed transaction. Another company of the ten, Easynet Worldwide Ltd, owns a further series of companies the precise details which do not matter save to note that in the sub-structure is a company called EGL (UK) Ltd which holds six further companies, two of which are to be transferor companies in the proposed transaction and the remaining four, which are Spanish, Italian, French and Dutch respectively, are not to participate directly in the transaction. This second Dutch company (Easynet Nederland BV) also holds a Belgian company which again will not directly participate.

The transaction aims to merge all the other UK companies in the structure as well as BV into the Company, Easynet Global Services Ltd. The result will be that the Company will hold the shares in eight of the foreign companies mentioned above, i.e. the Chinese, Hong Kong, Swiss, USA, Spanish, Italian and French companies as well as Easynet Nederland BV. That is what I meant by those companies not directly participating. The Company will be left holding the various assets and liabilities of the other 21 companies. Two diagrams were provided which show the structure before and after the transaction has completed – they are in Annex 1.

Some or all of the eight foreign companies are trading, have employees and are earning income. The transaction is of significant value. It would increase the attributable reserves within the Company from about £28m to about £70m.

Subject to three points addressed below, based on the information I have seen so far there is nothing else about this transaction which would suggest that the court might refuse to approve its completion at a final hearing under the Cross-Border Mergers Regulations. Some of the companies directly involved have trade creditors. None have employees. Many of them have inter-company group obligations but without binding any decision in future made with more information than is provided at this stage, one would not expect those to cause difficulty.

Two matters were raised in the application which I can deal with shortly.

The first short point is the proposed arrangements relating to the control of the transferee company itself. Under the draft terms of the merger the end result is to be that the Company will be held directly by Interoute Communications Ltd. In order to facilitate this the Company is to buy back its sole share held by MDNX Group Holdings Ltd and then issue a share to Interoute Communications Ltd UK. Mr Horan submitted this should not cause difficulty in these circumstances and I cannot see any reason why it would.

Second is the point at paragraph 2(c) above about the arrangements for the waiver of consideration. The draft terms of the merger provide that apart from one share to be issues by the Company to Interoute Communications Ltd following buy back of its one share held by MDNX, all other shareholders of the transferor companies waive their entitlement to any shares or other consideration for the merger. This makes sense because these companies are all in the same group and are being merged in to another member of the same group. Terms of this kind were considered by Hildyard J in Re Olympus UK Ltd[2014] 2 BCLC 402 and after giving the matter careful consideration he held that such arrangements were capable of being sanctioned under the Cross-Border Mergers Regulations. I respectfully agree and have nothing to add on that.

The problem is the following. Of all the 22 companies involved only one is an EEA company outside the UK. That is BV. BV is dormant. It has never traded and has no appreciable assets (only some modest inter group receivables about €17,000). While BV was not created simply for the purpose of it becoming involved in this transaction, it is also manifest (and not denied) that its only purpose in this transaction is to bring it within the scope of the Cross-Border Mergers Regulations. In my judgment it is fair to describe the inclusion of BV in this transaction as a device. The question I have to decide whether that device works or is capable of working.

Mr Horan submits that the transaction falls within the court’s jurisdiction provided by the Cross-Border Mergers Regulations and there is no reason to refuse to approve it. To address this I need to deal with relevant legislation.

The overall scheme set up by the Cross-Border Mergers Regulations and the stages it involves have been described elsewhere, see e.g. paragraphs 13-25 of Olympus. I will not repeat it in detail. Briefly, there is a process involving certification at the pre-merger stage by a “competent authority” in each of the relevant member states for all the companies (transferee(s) and transferor) and then a final approval by the competent authority in the transferor’s member state. Following approval the order is delivered to the Registrar of Companies and the merger takes effect on a given date by operation of law. The designation of a competent authority is up to each member state. It could be a court, notary or other competent authority. In the UK it is the court.

A key provision is Regulation 2, which needs to be interpreted in the light of Article 2 of the relevant Directive (2005/56/EC). They are:-

Regulation 2 of the UK Regulations

“2 Meaning of “cross-border merger”

(1)

In these Regulations “cross-border merger” means a merger by absorption, a merger by absorption of a wholly-owned subsidiary, or a merger by formation of a new company.

(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 those companies is a UK company;

(d)

at least one of those 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 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.”

Article 2 of the EU Directive

“Definitions

For the purposes of this Directive:

[…]

2.

‘merger’ means 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, 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 they form, the new 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

(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.”

On the general approach to the interpretation of the Regulations Mr Horan referred to the decision of Henderson J In re Itau BBA International Ltd[2012] EWHC 1783(Ch), as follows:-

“16 It can be seen from this that: (a) a merger by absorption in regulation 2(2) of the 2007 Regulations is derived from article 2(2)(a); (b) a merger by formation of a new company in regulation 2(4) is derived from article 2(2)(b); and (c) a merger by absorption of a wholly-owned subsidiary in regulation 2(3) is derived from article 2(2) (c). It is also important to note that the only description of the transferee in the first form of merger is that it is “another existing company, the acquiring company”. The language is descriptive, not purposive. It says nothing about the intentions of the participating companies, or the reasons why the transferee company exists. Nor does it lay down any conditions that the existing company has to satisfy.”

The point that Mr Horan sought to derive from the judgment of Henderson J was that the language was descriptive not purposive and says nothing about the intentions of the participating companies. I respectfully agree with Henderson J’s analysis but I do not believe that it has a significant bearing on the question I have to decide. Itau concerned a cross-border merger in which the transferee company which was a UK company had been created for the purpose of the transaction. The question was whether it was a “existing transferee” so as to comply with Reg 2(2)(b) even though it had not existed before the transaction was proposed. Henderson J held that this complied with the Regulations on their true interpretation and that was the context for his observations about the nature of the language used. However the court there was not concerned with a device like the one in this case. The case was about a bank incorporated in Portugal which wished to transfer its headquarters and domicile from Lisbon to London and in order for a credit institution to conduct wholesale banking business both in the UK and elsewhere, it was necessary for it to obtain authorisation from the FSA. In practice these authorisations were only granted to companies incorporated in the UK. So that was what the UK company was for. In no sense was the creation of the UK company or its inclusion in the merger simply a device to bring a transaction within the scope of the Regulations.

The other authority which has a bearing on the interpretation of the Regulations is the Olympuscase which I have mentioned already. Mr Horan referred me to a number of paragraphs from the judgment of Hildyard J including paragraph 5, 45, 49, 51 and 54 which emphasise the European origin of the terms of the legislation and the fact that they should be given an autonomous meaning which is not necessarily the same as the meaning they would be given if they were simply domestic legislation. I accept that submission, noting that the facts of Olympusare a long way from the facts of this case as well.

Mr Horan submitted that whole matter stands or falls on the question of whether what is proposed is a merger within Reg 2 and that since it is, the jurisdiction follows, nor is there anything by way of discretion to suggest it should not be approved. In relation to discretion Mr Horan submitted that the queries raised by Morgan J in Livanova Plc [2015] EWHC 2865 (Ch) of the test applied at the approval stage posited by Sales J in Diamond Resorts (Europe) Ltd[2013] BCC 275 was well founded. Nevertheless he also submitted that the Company would be able to satisfy the Diamond Resorts test insofar as it looked to see that there were no materially adverse effects on shareholders, employees and creditors.

I will say straight away that I accept that the proposed terms describe an “operation”, to use the words of Reg 2, which literally satisfies all the express criteria in the Regulation. However, it seems to me that the question is not simply answered in that way. The problem I perceive is that the cross-border characteristic which brings the “operation” within the letter of the Regulations is only the result of a device.

As the relevant competent authority, in my judgment the court cannot and should not shut its eyes to what it is which gives this “operation” a cross-border nature. That is purely the inclusion of BV. The operation would be the same without its inclusion, the only difference between the two being a truly trivial difference caused by the inter group receivables of BV. The decisions of the Companies Court in Itauand Olympusdo not mandate that the Court should ignore the reality of what is proposed.

A relevant consideration in construing and applying the Regulations must be to take account of the purpose for which the Cross-Border Merger legislation was passed. Mr Horan referred to the domestic Explanatory Memorandum on the Regulations and the domestic Transposition Note concerning transposition of the Directive into UK law. The Explanatory Note (para 2.1) refers to the purpose as being to lay down a framework of rules to facilitate cross-border mergers between companies in the EU and remove obstacles in national laws to such mergers. The second paragraph of the Transposition Note makes a similar point referring to the aim of the Directive to increase company mobility in the Single Market. Mr Horan also referred to paragraph 7.5 of the Explanatory Memorandum which refers to the provision of safeguards for shareholders, creditors and employees. He placed emphasis on paragraph 7.8 which indicates that the Government sought to take a light touch approach to implementation.

The recitals to the Directive itself bear out the passages in the Explanatory Memorandum and Transposition Note which Mr Horan referred to. Recital 1 makes it clear that the Directive is concerned with the need for cooperation and consolidation between companies from different Member States (see also recitals 2, 3 and 7). The point of the Directive is to facilitate movement across borders. Notably the Directive is not purporting to harmonise national law itself insofar as it has purely domestic effect and I can find nothing within it which suggests that any purely domestic mergers should be conducted in an analogous manner and with the same legal effects as the cross-border mergers provided for in the Directive. I gather from Mr Horan that today in the EU Member States have different national laws dealing with what is and is not possible domestically. There is nothing to suggest that either the Directive, or the Regulations enacted to comply with it, are designed to permit what might otherwise be a novel form of domestic company law transaction. There is a reference in recital 2 to national law but that is not what it is concerned with. Nor is there anything to suggest that such a novel form of domestic company law transaction should be facilitated by the mere inclusion within it of a company from a different Member State which is dormant, has never traded and has no relevant assets, liabilities, employees, or other obligations and the only purpose of which is to bring the real transaction within the Regulations.

Mr Horan confirmed that there are other ways of achieving a corporate reorganisation whereby the end result is essentially the same in that the Company would hold all the same assets and liabilities. Two were mentioned in argument. One is a reconstruction under s900 of the Companies Act 2006. However that is not an approach the Company wishes to take here because of the difficulties described by Henderson J in Re TSB Nuclear Energy Investment UK Ltd [2014] EWHC 1272 (Ch) running back to Nokes v Doncaster Amalgamated Collieries [1940] AC 1014 (see Henderson J paragraphs 11-12). As Henderson J explains the key difference between a merger under the Cross-Border Mergers Regulations and one under s900 is the effect on contracts with third parties. By using the Cross-Border Regulations the court can sanction transfers of contracts which would not otherwise be possible under UK law without novation.

The other possible approach is to use the provisions in s110 of the Insolvency Act 1986 but I gather that may have tax disadvantages. Moreover the involvement of insolvency legislation when the companies are not insolvent can be misconstrued.

These drawbacks of s900 and the Insolvency Act may well explain why the Company wishes to take this approach but they do not justify doing so. Mr Horan referred to Re National Bank [1966] 1 WLR 819 (Plowman J) and an extract from Re TDG plc [2009] 1 BCLC 445 (Morgan J) at paragraph 33 which show that it is no objection to a company using a lawful approach such as a scheme of arrangement to effect a takeover instead of the express contractual takeover provisions under a separate part of the Companies Act for an objector to argue that it could have used a different approach which was also open to it but which worked in a different way. In my judgment this is beside the point since the question is whether the Cross-Border Merger Regulations apply at all.

In any event the various options which may or may not be available to achieve what the group wishes to achieve differ significantly in the processes to be used as well as the nature and degree of scrutiny provided for. Whatever the correct approach to approval under Reg 16 of the Regulations (Diamond Resorts or Livanova) that approval is not the same as a fairness hearing relating to schemes of arrangement. The options also differ as to their legal effects both on the companies but also, and more significantly in my judgment, on third parties such as employees, creditors and anyone else who is party to a contract between themselves and one of the companies. These differences serve to underline the point that while the group companies are entitled to use any appropriate method to achieve the reorganisation they want, the question I have to consider is not whether it is acceptable for the Company to choose an approach which is available to it over other approaches, the question is whether the cross-border merger approach is properly available.

Mr Horan argued that the Directive and Regulations are concerned with mergers of companies not businesses, which I accept although noting that the ultimate purpose of the directive is about the completion and functioning of the single market (recital 1). Mr Horan also submitted that a finding that this proposal is outside the Regulations or a finding that the problem I have described is a factor of any materiality in the final approval process under Regulation 16 necessarily introduces a commercial assessment of substance and purpose by the competent authority and that this would be unwarranted and would create difficulties in its application. This submission ties in with the Company’s references to Itau and Olympus which I have already referred to. He sought to bolster the submission by proposing a series of examples in order to show that it was impossible to draw a line between mergers which are acceptable and the one in this case. The examples start from the merger of a single dormant Dutch company into a UK transferee, next is a merger of two dormant transferors, one UK and one Dutch and the exampled go on in that vein adding material assets. Another factor is whether the companies involved represent all the companies in a group (in fact in this case the group of which all these companies are members has yet further companies which are not involved at all).

In my judgment these submissions miss the point. Whenever the problem of form and substance arises it is always possible to posit examples of a similar kind to the ones proposed by Mr Horan but they are not real cases and are not presented in a real context. I appreciate that a conclusion that the inclusion of BV in this transaction is a device involves an assessment of the substance of what is going on and not the form, but that does not mean that the degree of scrutiny needed to spot this sort of thing would be at all problematic or burdensome. Anyone looking at this transaction would immediately wonder what the point of including the BV was. In most cases this sort of problem simply does not present itself.

Mr Horan placed emphasis on the fact that the competent authorities in different states may be notaries rather than a court, the implication being that this involves a lower level of scrutiny than I am entering into. I do not believe this is a significant point in any case but I would need more material to be persuaded that the level of scrutiny of notaries in continental jurisdictions is necessarily as low as Mr Horan implies. I have seen at least one case in which the notary required a company to give bank guarantees in favour of local creditors so it cannot be said that such a system is always and inevitably a rubber stamp.

Mr Horan referred to the legitimacy of the purpose of simplifying a corporate structure and reducing costs, submitting that the Company and other members of the group are free to choose to structure its reorganisation as they see fit to take it within the Regulations. I do not doubt the legitimacy of wanting to simplify a corporate structure or save costs but its begs the question to assert that the Company is therefore free to use this method to achieve its objectives.

Throughout the submissions I detect an approach to the companies in issue which treats them in an unduly mechanistic way, without regard to the effects of all this on the interests of third parties such as trade creditors. A reorganisation carried out using the Cross-Border Mergers Regulations involves a particular procedure and has particular legal effects and consequences both for the companies involved and for third parties. This procedure and these effects and consequences were provided for in the law to achieve a particular purpose. In my judgment this proposed transaction is not the kind of transaction which the Regulations and the Directive were enacted to facilitate. The Regulations as a whole and Reg 2 in particular have to be interpreted having regard to the purpose for which the Regulations was enacted. Read that way this transaction does not satisfy the requirements of Reg. 2 when it is properly interpreted and does not fall in the jurisdiction of the court. While it can be said to be a merger, it is not, in reality, a cross-border merger at all.

If I am wrong and the transaction does fall within the relevant jurisdiction then nevertheless in my judgment the nature of it, and in particular the fact that it is within the scheme of the Regulations purely as a result the device of including BV, is something which the Court could and should take into account at the discretion stage. I do not believe it is necessary to get in to the debate between Diamond Resorts and Livanova on the precise scope of the discretion and the Court’s approach under Regulation 16 once all the cross-border merger formalities had been completed. On any view it would be appropriate for the Court to consider this aspect of the matter when it came to discretion. Based on the information available I fail to see how the Court could do anything other than refuse to sanction this merger in these circumstances.

I am well aware of Mr Horan’s complaint that the conclusion I have reached creates an imprecise test and invites the court to second guess commercial decisions. Certainty in the law it at a premium in commercial sphere but I do not accept the submission that seeing this transaction for what it truly is and finding it to be outside the Regulations creates any real uncertainty. After all the applicant clearly knew there was a possible concern otherwise this application would not have been made.

I will hear counsel on the terms of an appropriate order to be made.

On receipt of the draft judgment counsel made the following submission concerning paragraph 12 above:

“It is not the case that BV’s only purpose in this transaction is to bring it within the scope of the Regulations. It is intended that BV should be dissolved without going into liquidation with the consequential effects on its assets and corporate status under the Regulations.”

In the light of that submission I have given further thought to paragraph 12 and this judgment. The paragraph explains the view I formed that it is manifest that BV’s only purpose in this transaction is to bring the transaction within the scope of the Regulations. The paragraph also said that this was not denied. Looking at the matter again, nothing in the evidence or in argument at the hearing suggested otherwise. In my judgment the new statement about what is intended does not change anything either. It is correct that under the Regulations the merger would have the effect described on the assets and corporate status of BV, but that is plainly not the reason why BV is included in this transaction.