Easynet Global Services Ltd, Re

A cross-border merger falls within the Companies (Cross-Border Mergers) Regulations 2007 and Directive 2005/56/EC if it satisfies their ordinary express criteria, including participation by companies governed by different Member States’ laws. The court should not imply an additional requirement that the foreign company have substantial operations, assets or commercial activity.

Using a dormant foreign subsidiary to engage the cross-border merger regime is not, without more, a device or an abuse of rights. Abuse requires objective circumstances showing that the purpose of the EU rules has not been achieved and a subjective intention to obtain an advantage by artificially creating the conditions for it. The regulation 16 discretion must be exercised compatibly with EU law.

The appellant proposed a merger in which a number of UK companies would transfer their assets and liabilities to Easynet Global Services Ltd. A dormant Dutch company with no appreciable assets, liabilities, employees or trading activity was included solely to make the transaction cross-border and engage the statutory regime.

Birss J held that the proposal was not, in reality, a cross-border merger within the Companies (Cross-Border Mergers) Regulations 2007 and, alternatively, that the court should refuse approval under regulation 16. The appeal concerned whether the proposal fell within the Directive and Regulations and whether the inclusion of the Dutch company constituted an abuse of law or justified withholding approval.

1. Appeal allowed. The proposed arrangements constituted a cross-border merger within Directive 2005/56/EC and the Companies (Cross-Border Mergers) Regulations 2007.
2. The Directive applied to mergers of limited liability companies formed under the law of Member States where at least two participating companies were governed by different Member States’ laws. The proposal met that definition according to the ordinary meaning of Articles 1 and 2. The Directive’s purpose was to facilitate cross-border mergers, while protecting members, creditors, employees and others through the pre-merger and final approval procedures. It contained no requirement that a participating foreign company have substantial economic activity or assets.
3. The principle of legal certainty supported a straightforward interpretation of the Directive. Imposing an additional, undefined limitation would restrict freedom of establishment under Article 49 TFEU and would make it more difficult to reorganise corporate groups through dormant or small-scale foreign subsidiaries.
4. The inclusion of the Dutch company did not amount to abuse of law. The companies were exercising wide and unconditional rights of establishment and participation in cross-border mergers. The objective and subjective elements identified in Emsland-Stärke GmbH Case C-110/99 were absent: the purpose of the Directive was achieved, and the use of the statutory procedure for legitimate commercial purposes was not collateral or fraudulent. Centros Ltd v Erhvervs-og Selkabsstyrelsen EU:C:1999:126 and Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd EU:C:2003:512 confirmed that the reasons for incorporation in a particular Member State, including reliance on more favourable legislation and dormancy, were generally irrelevant save in cases of fraud.
5. Regulation 16 reflected Article 11 of the Directive and did not create an additional restriction on EU rights. Subject to other relevant matters arising during the procedure, the court would be obliged to approve implementation of the merger. The court did not decide whether the Article 11 or regulation 16 stage also required review of the interests of members, creditors and others located in other Member States, since that issue did not arise and full adversarial argument was unavailable.
6. David Richards LJ and Davis LJ agreed with the result. David Richards LJ additionally endorsed the need for independent and critical scrutiny of largely unopposed company-law applications. Davis LJ explained that labelling an operation a “device” cannot itself defeat the intended statutory effect; the correct approach is to ask whether the express requirements are met, subject to fraud or abuse of rights.

1. Court of Appeal (Civil Division) — Appeal allowed. The court held that the proposed merger fell within Directive 2005/56/EC and the Companies (Cross-Border Mergers) Regulations 2007, and that approval could not be withheld on abuse-of-law grounds: [2018] EWCA Civ 10.
2. High Court (Chancery Division) — Birss J held that the proposal was not, in reality, a cross-border merger within the Directive and Regulations and alternatively indicated that approval should be refused: [2016] EWHC 2681 (Ch).