Portman Insurance Plc, Re

I have before me a Part 8 claim form for certification under Article 25(2) of Council Regulation (EC) No 2157/2001 on the Statute for a European Company (SE) (“the SE Regulation”), which came into effect on 8 October 2001, conclusively attesting to the completion of pre-merger acts and formalities.

The SE Regulation was designed to meet the problem that companies in different Member States who wish to merge had to choose a form of company governed by the particular law of one Member State. This was seen as a structural barrier to completion of the internal market and free trade. The solution is the creation of a Societas Europaea (“SE”). It is governed by the law of the Member State in which it has a registered office which will consist of: the SE Regulation; any other law implementing European measures applicable to an SE; and otherwise the law relating to public limited liability companies.

In brief summary, an SE will be formed by at least two companies originating in different Member States who will: (i) merge; (ii) establish a European holding company or (iii) establish a European subsidiary. Alternatively a public limited company may be converted into an SE provided it has had a subsidiary governed by the law of another Member State for at least 2 years (see Articles 2 and 17).

Formation must be scrutinised by the court. This has to occur before the SE can be registered in the Member State in which it has its registered office. Once registered, the merger cannot be declared null and void and any absence of scrutiny of its legality may be included among the grounds for winding up an SE.

Scrutiny is achieved through a two stage process. At this, first stage the court is concerned to ensure through scrutiny that procedural requirements are satisfied. The second stage under Article 26 of the SE Regulation will be heard by a High Court Judge who will consider completion of the merger and the formation of the SE including approval of the draft terms of merger, arrangements for employee involvement and any other issues that may arise, for example concerning its effect upon creditors.

This claim concerns a proposed merger by absorption between Portman Insurance Plc and Portman SA, its wholly owned subsidiary incorporated in France, and the simultaneous formation of an “SE”. It is intended that the SE will relocate to France and merge with its parent, Colisee Re SA. These are all companies of the AXA Insurance Group and these steps are part of the rationalisation of its European operations.

Portman plc is a substantial insurance operation. The accounts to the year ended 31st December 2015 disclose shareholders' funds of £82,650,000 after a profit for the financial year of £5,478,000. Portman SA was incorporated on 20th May 2016 for the purpose of participating in the establishment of the SE. Its interim accounts as at 30th June 2016 show only cash of €37,000 and subscribed capital of the same amount.

Subject to one issue, I am satisfied from the evidence before me that a certificate should be issued conclusively attesting to the completion of pre-merger acts and formalities.

The issue is whether certification should be refused because Portman SA is a non- trading, dormant company and in effect a shell. The issue is raised by Mr Moore QC out of caution and pursuant to the duty counsel owes to the court, whilst at the same time strongly submitting that the issue has no merit generally or on the facts of this case.

In my judgment he is right to raise it and by doing so upholds the traditions of the Bar. It is an issue identified from the decision of Mr Justice Birss in Re Easynet Global Services Limited [2016] EWHC 2681 (Ch). This was a claim for approval under the Companies (Cross-Border Mergers) Regulations 2007 of a merger of 22 companies. Only one of the 22 was an EEA company outside the United Kingdom and this company was dormant, had never traded and held no appreciable assets. The learned Judge held that “its only purpose in this transaction is to bring [the merger] within the scope of the Cross-Border Mergers Regulations”. As a result he found its inclusion to be “a device” and decided that “this proposed transaction is not the kind of transaction which the Regulations and the Directive were enacted to facilitate”.

Birss J’s underlying point was that the Cross-Border Mergers Regulations were only intended to apply when the merger was truly cross-border. It was not intended to apply to a purely domestic merger. The merger before him was in truth a domestic merger and could not be treated differently simply by using the device of inserting a non-UK, EEA company when in reality it would have no genuine part to play in and was not otherwise required to be part of the merger. The learned Judge found that the Regulations and the Directive from which they emanated did not intend “to permit what might otherwise be a novel form of domestic company law transaction” through such a device.

Whilst this decision is concerned with a different and distinct Regulation, I would be bound by a decision of a High Court Judge to follow that approach if such a device is relied upon here and it would be contrary to the purpose of the SE Regulation.

I accept the submission of Mr Moore QC that this merger cannot be considered a device in the sense defined and identified by Mr Justice Birrs. It is true that Portman SA is also dormant but this is not a case where the dormant company would have nothing to do with the merger except to enable the companies who wish to merge to be able to do so using the SE Regulation. The whole point of this transaction is that both companies want to merge in order to form an SE and this is being done as part of a reorganisation of the European structure. The use of Portman SA is not a ruse to achieve a merger of and designed for other companies. Portman SA and Portman Insurance plc wish to merge together.

In my judgment that distinction provides the answer to the issue provided the SE Regulation does not prohibit a merger when one company is a shell company.

The argument for prohibition has to rely upon a purposive construction because there no express provision within the Articles requiring the companies or (if appropriate) subsidiaries forming the SE to have traded or to be trading.

The recitals envisage the Regulation being applied to achieve more open trade between Member States. They refer to the importance of having a European company as a structure for business in order to assist in trading between Members and thereby complete the internal market by removing trade barriers. The aim to be found within the recitals is for companies in member states to have “the option of combining their potential by means of merger”. The underlying purpose of creating an SE is to remove the compulsion to adopt a company with a legal framework based largely on national laws and offer instead a legal framework which matches the economic framework of free trade. There is no reference and no requirement for an existing trading business.

The new framework offered by an SE is intended to be consistent with the removal of economic trade barriers. It will create companies with a “European dimension” formed and carrying on business under Community law which can operate alongside those governed by a particular national law (see in particular recitals (1)-(4) and (6)- (7)). In my judgment it cannot be concluded from the recitals that the companies concerned must be actively trading before an SE can be formed in accordance with Article 2.

The recitals explain that the SE might be formed by merger and, if that is so it must also be possible to form a holding company or joint subsidiaries. Similarly, one company must be capable of being transformed into an SE provided it has a subsidiary in another Member State (see in particular recitals (10)-(11)). At no stage do the recitals refers to a trading requirement. The absence of any such express requirement is therefore entirely consistent with the Articles. It is also notable that when the Articles introduce restrictions to the circumstances of merger, for example two year periods in respect of subsidiaries (see paragraphs 2b, 3b and 4 of Article 2), there is no additional reference to active trading.

In reaching my decision I note that paragraph 4 of Article 2, as mentioned above, enables a public liability company to “be transformed into an SE if for at least two years it has had a subsidiary company governed by the law of another Member State”. I refer to it because it is an alternative to the option of merger. However, in my judgment it cannot be construed as an option to be chosen depending upon the subsidiary having or having not traded. As with the other express provisions, there is no such requirement.

In my judgment active trading cannot be found to be a requirement of the regulation. There is no such express provision and a purposive construction does not produce that result. Certification should not be refused because Portman SA is a non-trading, dormant company and in effect a shell.