The EU wide cross-border merger framework
Cross-border mergers involving Gibraltar companies are governed by the Companies (Cross-Border Mergers) Regulations 2010 (the “Regulations”). The Regulations give effect to European Commission Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (the “Directive”).
The cross-border merger regime establishes a harmonised mechanism for qualifying legal entities established in EEA member states to effect transfers of assets and liabilities. From a Gibraltar perspective, the Regulations permit eligible entities from EEA member states to merge with Gibraltar limited liability companies (other than companies limited by guarantee or companies subject to winding up proceedings), as well as for multiple EEA companies to merge into one newly formed Gibraltar company. The reverse is also possible since Gibraltar companies are permitted to merge with entities in other EEA member states.
In terms of mechanics, there are three possible general types of merger under the Regulations:
1. Merger by absorption – where one or more transferor companies transfer all their assets and liabilities to an existing transferee company;
2. Merger by absorption of a wholly-owned subsidiary – where a wholly-owned subsidiary transfers all of its assets and liabilities to its parent company (the most common form of merger); and
3. Merger by the formation of a new company – where two or more transferor companies transfer all of their assets and liabilities to a newly formed company.
One of the main advantages of such mergers is that they provide for the automatic transfer of assets and liabilities by operation of law. In Gibraltar for instance, mergers under the Regulations are sanctioned by way of an order from the Supreme Court. Cross-border mergers also enable for the automatic dissolution of transferor companies without the need for a formal liquidation, saving both time and costs. Furthermore, a merger approved by the relevant competent authority of one EEA state has full effect in other EEA states (subject to any filing requirements/special formalities required by applicable law) and accordingly provides valuable legal certainty.
Under the right conditions, therefore, a cross-border merger has significant advantages over a traditional asset purchase and subsequent liquidation. The procedure is just as effective whether used to effect intra-group reorganisations by large multinationals or for straightforward vertical parent/subsidiary absorptions. The ultimate result is the consolidation of assets, capital and resources within one single entity.
It is therefore unfortunate that, despite its popularity as a restructuring tool, its relevance for companies in Gibraltar (and the UK) in a post-Brexit world is under threat. As explained above, the Regulations derive from EU law. Therefore, if the UK, and consequently Gibraltar, cease to form part of the EEA, then references to ‘EEA states’ under the laws of other EEA states would, by definition, automatically cease to include/mean a reference to Gibraltar. In such a scenario, cross-border mergers with Gibraltar entities would no longer be possible under the framework established by Directive.
One possibility to counteract the above would be for Gibraltar to introduce or amend legislation to allow for its companies to merge with EEA companies. Other EEA States would however need to reciprocate by amending their own legislation on an analogous basis, which could prove difficult. Nevertheless, there are already some countries which allow for mergers with non-EEA countries, meaning that there are precedents. It should also be noted that cross-border mergers are not currently possible between the United Kingdom and Gibraltar due to peculiarities in the latter’s particular form of EEA membership. However, this anomaly should be up for review as a consequence of Brexit and the revised arrangements which will be entered into between the territories.
As reported recently, the time currently set for the UK’s withdrawal from the EU is Friday the 29th of March 2019 at 11pm, although it is to be seen whether this will be extended, subjected to a transitional deal, or even reversed (albeit unlikely). In a worst-case scenario, however, any entities within the EU seeking to avail themselves of the merger procedure in order to relocate to Gibraltar will only have some fifteen months or so in which to do so.
Relocation to Gibraltar
As Gibraltar moves ahead with a number of new business initiatives, most notably the upcoming introduction of its regulatory framework for Distributed Ledger Technology (DLT), interest in the jurisdiction continues to grow at remarkable levels. This was recently confirmed by Gibraltar’s Minister for Commerce, Albert Isola, who reportedly cited the level of interest in the territory as “absolutely staggering”. Gibraltar also continues to attract new gaming, financial services and fintech firms to the Rock thanks to its robust regulatory environment, business-friendly reputation and low-cost base.
In the insurance sector specifically, a number of insurers based in other EU countries have already signalled an intention to re-domicile their operations to Gibraltar, driven primarily by a requirement to access the UK’s financial market post-Brexit (access which Gibraltar has been assured it will continue to benefit from pursuant to bilateral arrangements with the UK). It should be noted that the relocation of an insurance company is best achieved via a re-domiciliation, rather than by way of a cross-border merger, due to regulatory implications arising from a transfer of policies, and this topic will be covered in a future article.
In light of the above, any EU business considering relocating to Gibraltar in the near future should contemplate whether the cross-border merger mechanism will enable them to achieve this in a cost-effective and efficient manner. From a practical perspective, the Gibraltar aspects of a cross-border merger can be completed in as little as three to six months, meaning that any such mergers should be commenced in the next six to nine months to ensure that any potential Brexit implications (if any) are avoided.
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.
Christian Caetano specialises in the fields of insurance and financial services, corporate and general business law. He is particularly active in the Gibraltar insurance market, where he advises open market insurers, captives, insurance managers and intermediaries on a range of regulatory, business conduct and corporate law matters. Click to read more about Christian Caetano