Directive 2005/56/EC of the European Parliament and Council on cross-border mergers of limited liability companies was implemented in the UK by the Companies (Cross-Border Mergers) Regulations 2007 (the "Regulations"). The Regulations permit the merging of EU-resident limited companies by operation of law, pursuant to which the assets and liabilities of the transferor move to the transferee, and the transferee is dissolved without having to go through a formal liquidation.
The Regulations do not extend to the Isle of Man, and there are no equivalent provisions under Manx law. Nevertheless, a similar outcome can be achieved by means of a scheme of reconstruction under section 222 of the Companies Act 1931. That section enables a Manx company (the "Transferor") to be merged into an overseas company (the "Transferee") by means of a members' voluntary winding up.
In order to effect a scheme of reconstruction, the approval of the Transferor's shareholders will need to be obtained via the passing of a special resolution, amongst other things, to wind up the Transferor, to appoint a liquidator, to approve the terms of the scheme of reconstruction (which would be set out in a detailed circular to shareholders, which would include notice of the general meeting at which the special resolution would be considered and a form of proxy), to disapply any provisions in the Transferor's articles of association which might conflict with the scheme, and to authorise the liquidator to enter into and give effect to a "transfer agreement". The transfer agreement is a contract, which is entered into between the Transferor and the Transferee (and between the Transferor's manager/administrator and custodian, if the Transferor is a collective investment scheme) by means of which the scheme is implemented, and the assets of the Transferor are transferred to the Transferee in consideration for the allotment of shares in the Transferee to the shareholders of the Transferor. The Transferor would also execute any documents which are needed to effect a transfer of legal title to the assets to the Transferee.
Shareholders who do not vote in favour of the resolution to approve the scheme are able to express their dissent from the scheme in writing to the liquidator at the Company's registered office within seven days after the passing of the resolution. Any such dissenting shareholders may require the liquidator either to abstain from carrying the scheme into effect or to purchase their shares at a price to be agreed between them. If the resolution to approve the scheme is passed, the scheme becomes binding, subject to the rights of dissenting shareholders noted above, on all shareholders and all persons claiming under or through them whether all shareholders vote in favour of the scheme or not.
Before the effective date of the transfer of the Transferor's assets, the liquidator must make provision for the liabilities of the Transferor, the costs involved in the liquidation and reconstruction, and the costs involved in the realisation and transfer of the assets. Should the amount of the provision exceed the Transferor's liabilities, any surplus may be distributed by the liquidator to the shareholders of the Transferor as one or more cash distributions during the transfer, or, if the amount is insignificant, the scheme may provide for it to be transferred to the Transferee. The remaining assets of the Transferor (after the liquidator has made provision for liabilities) are transferred to the Transferee.
As soon as practicable after the transfer by the liquidator of the Transferor's assets to the Transferee, the Transferee will issue its own shares to the shareholders of the Transferor. The scheme would include a formula for determining the value and number of shares in the Transferee to which each shareholder of the Transferor would be entitled. The Transferee issues its own shares by way of satisfaction and discharge of the shareholders' respective interests in as much of the undertaking, property and assets of the Transferor as were transferred to the Transferee in accordance with the scheme.
This process does not bring about a true merger, as the assets of the Transferor must pass to the Transferee and the Transferor must be wound up, although the ultimate outcome is the same. The Manx legislation which permits this process dates from early in the last century, and its familiarity should reduce time and cost scales. By contrast, the Regulations require a court process to bring about a merger, which has an inevitable impact on timescales and costs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
