Whilst recently advising on a cross border merger by acquisition, a client questioned why companies involved in a merger having the same shareholders owning the same proportion of share capital in all merging companies, or having the same ultimate beneficial owner, need to issue shares in the acquiring company in return for the assets and liabilities of the acquired company.   The merger would not change any of the shareholders’ rights, since as a result of the merger such shareholders will continue to own, through the acquiring company, the acquired company’s assets and liabilities, and in the same proportion.

The concept of doing away with the requirement of having a share exchange ratio is already known under European and Maltese law, since this is the case where a parent merges with its subsidiary, since following the merger, it will continue to hold through the acquiring company, the assets and liabilities previously indirectly held in transferor company.

The definition of merger in local regulations, which is identical to that provided for in the relevant European directive, requires that the transfer of assets and liabilities in a merger is done in exchange for the issue to the members of transferor company of securities or shares representing the capital in transferee company, making it difficult to do away with the share exchange ratio, other than where specifically allowed at law.

In 2014 the English court was called upon by applicants Olympus UK Limited, Olympus UK (Holding) Limited and Olympus Newco Limited, all wholly owned by the same ultimate beneficial owner, to declare that there was no need to apply a share exchange ratio, where shareholders in the UK companies, which were to be acquired by a German acquiring company, waived their rights to acquire shares in the acquiring company in exchange for the transfer of the assets and liabilities of the acquired companies.  The presiding judge, whilst accepting that the matter was not straightforward, concluded that the requirement was satisfied if the shareholders were offered shares in exchange and declined to take up the offer.  Essentially the court recognized a shareholder’s right to waive its right to receive shares in a merger by acquisition, thus doing away with the need to allot securities or make cash payment to holders of shares in the acquiring company in return for the transfer of assets and liabilities of the acquired company. 

In following European Acquis Communautaire, the English Court interpreted the words “issued” in a European context rather than restricting itself to English Law.  Having looked at French and German law, the Court interpreted this to mean a grant, an allocation or allotment.  The term within a European context was to be thought of as referring to a right to receive shares or be paid cash, a right which could be waived (provided national law allowed such waiver).

Certain jurisdictions specifically exempt members within the group from providing for a share exchange ratio.  It appears from the above case law that the UK has also accepted the principle; a similar cross border merger was registered in France without being contested by the registering authorities or interested third parties.

In the absence of legislative intervention to deal with the matter, it remains to be seen whether local courts and the relevant authority will be bold enough to take the step in this direction, and in the affirmative whether this will be limited to merging companies having the same ultimate beneficial owner, or whether it will also extend to those companies whose shareholders hold the same proportion of shares in all companies involved in the merger.