New regulations revoke the cross-border merger regime effective when the UK leaves the EU.
The UK cross-border merger (“CBM”) regime has been a popular mechanism for corporate reorganisation in recent years. However, as a result of the introduction of the Brexit-related Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019 (the “2019 Regulations”), the UK CBM regime will cease to apply on “exit day”. In this article, Richard Lewis, Evan Lacey and Devon McKenna report on the details and implications for UK companies.
Current CBM regime
The UK Companies (Cross-Border Mergers) Regulations 2007 (the “CBM Regulations”), which implement the provisions of EU Directive 2017/1132/EU of the European Parliament and Council, provide a mechanism for UK Companies to merge with companies registered in other European Economic Area states.
Since the CBM Regulations were introduced, CBMs have been a popular means of effecting corporate reorganisations, allowing for the assets and liabilities of a disappearing company to transfer to a surviving company automatically by operation of law on the merger effective date, and for the disappearing company to be dissolved without going into liquidation.
Impact of Brexit
Regulation 5 of the 2019 Regulations revokes the CBM Regulations effective on “exit day”, which term is defined in section 20(1) of the European (Withdrawal) Act 2018 (the “Act”). Originally, the definition of “exit day” was 29 March 2019 (at 11:00 p.m.). However, the Act allows a Minster to amend the definition of “exit day” by regulation in order to ensure that the definition is consistent with the date on which EU treaties will cease to apply to the UK.
The definition of “exit day” in section 20(1) of the Act was amended by the Secretary of State by regulation: (i) on 28 March 2019, in light of the first postponement Brexit, to 12 April 2019 (at 11:00 p.m.); and (ii) on 11 April 2019, following the second postponement, to 31 October 2019 (at 11.00 p.m.).
Accordingly, pursuant to the 2019 Regulations, if the UK leaves the EU without a withdrawal agreement and implementation period, the CBM Regulations will cease to apply on 31 October 2019.
It should be noted, however, that the second Brexit extension granted by the EU provides that if the UK has not held elections to the EU Parliament and the withdrawal deal negotiated between the UK Government and the EU has not been ratified by 22 May 2019, the UK will leave the EU on 31 May 2019 (at 11:00pm). In such case, further regulatory amendment of the definition of “exit day” will be required.
In the event that a withdrawal agreement including an implementation period is agreed between the UK and the EU before “exit day”, it may be that the CBM Regulations will continue to apply until the end of the implementation period. However, the terms of any such agreement and their implications would need to be carefully analysed before reaching such conclusion.
Considerations for UK companies
In light of the above, and while the position is not without risk given that a withdrawal agreement may be ratified prior to 31 October 2019, it is advisable that any CBM process is concluded by that date. As stated by the UK Government in its recent guidance note entitled ‘Structuring your business if there’s no Brexit deal’, ‘[a]ny UK companies that are undertaking a cross-border merger will need to ensure that they can complete the merger before exit and may want to seek legal advice on their individual case.’
In the meantime, KPMG Legal Services will continue to monitor developments and would be pleased to field any queries on this topic.