Easynet Global Services Ltd, Re

The Court of Appeal held that the proposed transaction fell within the scope of the Cross-Border Mergers Directive (2005/56/EC) and the Companies (Cross-Border Mergers) Regulations 2007 because it satisfied the ordinary meaning of the Directive's and Regulations' criteria (Articles 1 and 2; Regulation 2). The court emphasised that cross-border mergers engage the freedom of establishment under Article 49 TFEU and must be interpreted consistently with that freedom and the principle of legal certainty. The court further held that the inclusion of a dormant foreign subsidiary to create the cross-border element did not, of itself, constitute an abuse of EU law and that a domestic court must exercise any discretion under regulation 16 compatibly with EU law and the Directive's purpose.

This is an appeal from Birss J ([2016] EWHC 2681 (Ch)) about whether a proposed merger which included a dormant Netherlands company fell within the Cross-Border Mergers Directive 2005/56/EC and the implementing Regulations. The appellant, the proposed transferee company, sought permission under regulation 11 to convene a meeting of its sole shareholder as part of a process under the Directive and Regulations to merge a number of group companies into the appellant.

The High Court refused permission, finding that the inclusion of the dormant Dutch company was merely a device to bring the proposal within the Directive and that the merger was therefore outside the scope of the Regulations or, in the alternative, would be refused in the exercise of the court's discretion.

On appeal the Court of Appeal (Sales LJ, David Richards LJ and Davis LJ) allowed the appeal. The court analysed the scheme and purpose of the Directive and the implementing Regulations, the protection afforded by pre‑merger certification and final approval (Articles 10 and 11; Regulations 6 and 16), and the relationship with Article 49 TFEU (freedom of establishment). The court addressed the doctrine of abuse of law, reviewing the relevant CJEU and domestic authorities, and concluded that neither the Directive nor EU law permits the introduction of an unstated limitation excluding legitimate cross‑border mergers merely because the foreign constituent is small or dormant. The court therefore held that the proposed merger qualified as a cross‑border merger, that its implementation did not amount to an abuse of rights on the available material, and that a domestic court should not withhold approval under regulation 16 absent other compatible EU law reasons.

Nature of the application: permission under regulation 11 to convene a shareholder meeting as part of a cross‑border merger process and, ultimately, approval under regulation 16 to complete the merger.

Issues framed: (i) whether the proposed transaction fell within the Directive and Regulations; (ii) whether inclusion of a dormant foreign company amounted to an abuse of EU law; (iii) the extent of the domestic court's role at the Article 11/regulation 16 stage in protecting interests of persons in other Member States.

Reasoning in brief: the CA adopted a purposive and rights-protecting construction of the Directive and Regulations consistent with Article 49 TFEU and legal certainty, found no basis to imply limits excluding small or dormant subsidiaries, and applied established abuse‑of‑law principles to conclude there was no abusive use of the cross‑border merger procedure on the available facts. The court also emphasised that domestic discretion under regulation 16 must be exercised compatibly with EU law.

Appeal allowed. The Court of Appeal held that the proposed arrangements amounted to a cross‑border merger within the meaning of Directive 2005/56/EC (Articles 1 and 2) and the Companies (Cross‑Border Mergers) Regulations 2007 (Regulation 2). The inclusion of a dormant Netherlands company to create the cross‑border element did not, on the facts before the court, constitute an abuse of EU law. A domestic court exercising its discretion under regulation 16 must act compatibly with EU law and should not refuse approval merely because the foreign constituent is small or dormant where the merger meets the Directive's criteria and the procedural protections are satisfied.

Appeal from the High Court (Chancery Division), Birss J, judgment dated 31 October 2016, reported at [2016] EWHC 2681 (Ch); permission to appeal was granted and the matter was heard in the Court of Appeal (this judgment) on 18 January 2018. The Secretary of State for Business, Energy & Industrial Strategy intervened and made representations in support of allowing the appeal.