A new procedure for Mergers and Divisions in Ireland under the Companies Act 2014
By Lorcan Tiernan
Posted: 2nd June 2015 08:48
On 23 December 2014 the President of Ireland signed the Companies Act 2014 into law. At nearly 1,500 sections it is the largest substantive piece of legislation in the history of the state and represents a significant reform of Ireland’s company law regime. The 2014 Act consolidates, reforms and amends existing company law legislation and will impact every Irish company together with all directors of Irish companies.
The 2014 Act, which is expected to become operative in June 2015, is expected to make it easier for companies to do business in and through Ireland and will have significant implications for corporate restructurings and reorganisations. The Act introduces new procedures for the merger and division (within Ireland) of private companies whilst retaining the established mechanisms for reorganising companies e.g. schemes of arrangement. This article sets out the procedure under the 2014 Act for Irish private companies to perform mergers and divisions. See the Dillon Eustace websitefor further reading on the effect of the Companies Act 2014 on Irish companies generally.
Cross border mergers between Irish and EEA companies are still governed by European Communities (Mergers and Divisions of Companies) (Amendment) Regulations 2008 and the merger and division of Irish PLCs is covered separately under the Act.
Mergers are dealt with under Part 9, chapter 3 of the Act which is based on the EC Regulations applicable to cross border mergers (cited above). At least one of the merging companies must be a company limited by shares and none of the merging companies may be a PLC for this part to apply.
The Act provides for three different types of merger:
1. Merger By Acquisitionmeans a transaction in which a company acquires all of the assets and liabilities of another company (or companies) dissolved without going into liquidation, in exchange for the issue to the members of that company (or those companies) of shares in the first-mentioned company, with or without any cash payment.
2. Merger By Absorptionmeans a transaction whereby, on being dissolved and without going into liquidation, a company transfers all of its assets and liabilities to a company that is the holder of all the shares representing the capital of the first-mentioned company.
3. Merger By Formation of a New Companymeans an operation in which a company (or companies) on being dissolved without going into liquidation, transfers all its (or their) assets and liabilities to a company that it (or they) form — the “other company”— in exchange for the issue to its (or their) members of shares representing the capital of the other company, with or without any cash payment.
The first stage of the procedure for Irish private companies to merge requires certain reports to be prepared and approved.
Common Draft Terms
The directors of the merging companies must first draft and agree common draft terms of the proposed merger. The minimum requirements for these terms are set out in the Act. The directors of each merging company must also prepare, except in the case of a merger by absorption, an explanatory report explaining the common draft terms and the legal and economic grounds for and implications of the common draft terms. The Act sets out certain exceptions to this requirement which may be applicable.
Subject to certain exceptions, such as for a merger by absorption, one or more experts must be appointed to examine and make a report to the merging companies’ shareholders on the common draft terms. The expert’s report must, amongst other things, state the method used to arrive at the share exchange ratio and give an opinion as to its fairness and adequacy.
Documents to be published and registered
The common draft terms and a notice (in the form prescribed in the Act) must be registered in the Companies Registration Office at least 30 days before the respective resolutions approving the common draft terms are passed. Notice of the delivery of these documents to the CRO must also be published in the CRO Gazette and in one national newspaper. The members of each merging company have a right to inspect the relevant documents free of charge.
Approval of the merger
The next step is for the merger to be approved by the merging companies. The Act provides two procedures for approving mergers:
Summary Approval Procedure
The summary approval procedure is a new validation procedure involving the passing of a special resolution by the shareholders of a company and the swearing by the directors of that company of a statutory declaration of solvency.
In using the summary approval procedure for a merger, each of the merging companies may, by unanimous resolution of its members and its directors making certain declarations, authorise the merger to be put into effect in accordance with the common draft terms without the need for court confirmation. The approval of the merger by summary approval procedure has the same effect as if the merger had been confirmed by court order.
The declarations of both companies’ directors must then be delivered to the CRO within 21 days.
Alternative Approval Procedure
The Act also provides an alternative to the summary approval procedure for merging companies. Each of the merging companies must approve the common draft terms of the merger by special resolution at a general meeting. The merger must then be confirmed by the Court, see below.
Court Confirmation of Merger
The next step of the process is for all of the merging companies to make a joint application to Court for an order confirming the merger.
The procedure for the confirmation order is set out in the Act. If the merger is confirmed, a certified copy of the order is sent to the CRO. Creditors of the merging companies also have a right to be heard in relation to the confirmation of the merger.
On the making of the confirmation order by the Court, the following automatically occurs:
a) All of the assets of the transferor company transfer to the successor company;
b) If the merger is a merger by acquisition or merger by formation of a new company, the members of the transferor company or companies become members of the successor company;
c) Any legal proceedings pending against the transferor company continue against the successor company; and
d) The transferor company or companies are dissolved and are replaced in every contract and agreement to which they are a party by the successor party (even if agreement is stated to be personal and unassignable).
It should also be noted that the Act gives the Court power, if it deems it necessary, to authorise the giving of financial assistance for the acquisition of shares which would otherwise be unlawful.
Purchase of Minority Shares
The Act also provides for the situation where the merger has been approved and a minority shareholder wishes to have his or her shares bought out by the successor company. The price for the shares is determined by the stock exchange ratio set out in the common draft terms of the merger.
Civil liability can arise for directors and experts for any misconduct in preparing or implementing a merger. Shareholders may take a claim where they have suffered a loss or damage as a result of misconduct or untrue statements in any of the relevant documents.
Directors could also be criminally liable for untrue statements and exposed to a maximum penalty of €50,000 and/or five years in prison.
It is now possible for an Irish company to be divided so that its undertaking is distributed between two other Irish companies. The new rules in relation to divisions are largely similar, though not identical, to those which apply to mergers.
There are two types of division provided for under the Act:
Division by acquisition means a transaction consisting of the following:
a) Two or more companies, of which one or more but not all may be a new company, acquire between them all the assets and liabilities of another company that is dissolved without going into liquidation; and
b) such acquisition is—
i. in exchange for the issue to the shareholders of the transferor company of shares in one or more of the successor companies, with or without any cash payment, and
ii. with a view to the dissolution of the transferor company.
Division by formation of new companies means an operation consisting of the same elements as a division by acquisition consists of save that the successor companies have been formed for the purposes of the acquisition of the assets and liabilities referred to in that subsection.
Common draft terms and Experts report
In this regard, the procedure for mergers and divisions are almost identical. The directors of the participating companies must draft and approve common draft terms of division and an explanatory report which should both be along the same lines as required for a merger.
Approval of the Division
Each of the participating companies must approve the division. However, it should be noted that the Summary Approval procedure available to merging companies is not available for the purposes of giving effect to a division of companies. Instead, the Act provides for one unified approval and confirmation procedure.
The procedure for the purchase of minority shares applicable to mergers is also applicable to divisions under the Act.
Court Confirmation of Division
Once the division has been approved by each of the participating companies, they must then apply to court for an order confirming the division.
The order of the court confirming the division shall, from the effective date, have the following effects:
a) each asset and liability of the transferor company is transferred to the relevant successor company or companies;
b) where no request has been made by minority shareholders, all remaining members of the transferor company except any successor company (if it is a member of the transferor company) become members of the successor companies or any of them as provided by the common draft terms of division;
c) the transferor company is dissolved;
d) all legal proceedings pending by or against the transferor company shall be continued with the substitution, for the transferor company, of the successor companies or such of them as the court before which the proceedings have been brought may order; and
e) the relevant successor company or companies is or are obliged to make to the members of the transferor company any cash payment required by the common draft terms of division.
As is the case for a merger, the Court may authorise the giving of financial assistance for the acquisition of shares in relation to a division which would otherwise be unlawful.
Civil and criminal liability can arise for directors and experts for any misconduct in preparing or implementing a division in the same way as applies to a merger.
The changes to the mergers and divisions regimes under the new Companies Act are a welcome improvement on the existing methods of reconstruction and reorganisation of companies in Ireland.