Policy
Response
DTI: European Company Law and Corporate Governance
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Contact: Chris Lawrenson Date: 1 Jun 2007 |
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Implementation of Directive 2005/56/EC on Cross-Border Mergers of Limited Liability Companies
Response by the Building Societies Association
Introduction
1. The Building Societies Association (BSA) represents all 60 building societies in the United Kingdom. Building societies have total assets in excess of £310 billion and hold residential mortgages of almost £210 billion, approximately 18% of the total outstanding in the UK. Societies hold almost £200 billion of retail deposits, accounting for over 19% of all such deposits in the UK. Building societies also account for over 37% of all cash ISA balances. Building societies employ almost 50,000 full and part-time staff and operate through around 2,150 branches.
2. Directive 2005/56/EC (the Directive) provides a framework to enable cross-border mergers between companies, with share capital, from European Economic Area member states. Existing UK legislation does not provide for cross-border mergers between UK companies and companies in the EEA.
3. This paper provides the Association’s comments on the DTI consultative document on the implementation of the Directive. It deals particularly with question 3(d) in the consultation -
“Do you consider that the legislation facilitating cross-border mergers should be extended to –
a) Industrial and provident societies (including community benefit societies and credit unions)?
b) Friendly societies?
c) Building societies?
d) Limited liability partnerships?”
The Association takes the view that the Directive should be extended to building societies, but only on the basis that the provisions are no less stringent than those currently in place for transfers of the business of a building society within the UK.
EC Law Background
(a) The Directive
4. Paragraph 4.1 of the consultative document states –
“The Directive provides for cross-border mergers involving “limited liability companies”. This includes private and public companies with limited liability, but also some other corporate forms.”
5. On the face of it, therefore, the Directive does not apply to building societies. This is confirmed by an examination of the Directive’s provisions –
- Article 1 of the Directive states that it "shall apply to mergers of limited liability companies formed in accordance with the law of a Member State ....".
- Article 2 states that, for the purposes of the Directive, a limited liability company is either a company with share capital, or a company referred to in Article 1 of Directive 68/151/EEC.
- Article 1 of Directive 68/151/EEC lists the types of companies on a State-by-State basis, and for the UK, it specifies - "Companies incorporated with limited liability".
6. A building society's corporate form is of course that of a body corporate, but not of a company nor (by natural extension) of a company with limited liability. Technically, a building society is a society incorporated under the Building Societies Act 1986 (or under Acts that the 1986 Act repealed) - it is a unique type of corporate body.
(b) The Sevic Judgement
7. If that had been where matters ended, there would be have been no need for further comment because it would have been clear that the Directive was inapplicable to UK building societies. However, paragraph 4.1 of the consultative document goes on to refer to the European Court of Justice Grand Chamber Judgement Sevic Systems(1), which (in paragraph 2.9 of the consultation) is described as having decided that "cross-border mergers by absorbtion between EU companies were an exercise of freedom of establishment under the EC Treaty even without the legal framework laid down by the Directive".
8. The case concerned a merger between a German company and a company domiciled in Luxembourg. The German authority refused to register the merger on the ground that German law did not provide for cross-border mergers between companies. The Judgement suggested that cross-border mergers are permitted by Articles 43 and 48 of the European Treaty (freedom of establishment). A key passage in the Judgement is the following, in paragraph 30 -
"Therefore, the right of establishment covers all measures which permit or even merely facilitate access to another Member State and/or the pursuit of an economic activity in that Member State by allowing the persons concerned to participate in the economic life of the country effectively and under the same conditions as national operators."
9. Therefore, it seems that cross-border mergers are permitted without the need to rely on the provisions of the Directive2. Our understanding is that, this being the case, the DTI considers it proper to consider whether corporate bodies outside the definition of a limited liability company should be included in the UK regulations to implement the Directive(2). We understand that the potential benefit of this is that proper procedures could be developed, instead of leaving things to the uncertainties of the, naturally more general, Treaty provisions(3). However, it is worth noting the fact that not all commentators agree with the Sevic Judgement(4).
Building Societies
(a) The existing mergers and transfer of business provisions
10. We set out below the Association’s views on building societies and cross-border mergers. As noted above, UK building societies are a unique corporate form in the EEA. The Building Societies Act 1986(5) governs winding up, dissolution, mergers, and transfers of business (conversions and takeovers) – see below.
11. Two building societies may merge either by amalgamation (to form a new building society, with the existing ones merging into the new entity) or by transfer of engagements (where the transferee ceases to exist as a separate society). A building society may be taken over by an existing plc (as happened, for example, with Cheltenham and Gloucester Building Society and Lloyds TSB) or convert to plc status (as with, for example, Halifax Building Society). In either case, the building society ceases to exist in the building society corporate form. It is possible for a building society to have a plc subsidiary or, indeed, for a plc to take over a building society and operate it as a subsidiary (but not in the building society form or using the words ‘building society’ in its name).
12. Therefore, a building society cannot merge with a plc and continue to exist as a building society. For that reason, the provisions in the 1986 Act relating to conversions and takeovers (such as the arrangements for voting turnout and majority, bonuses etc) are more relevant to cross-border ‘mergers’, than the provisions concerning mergers between building societies. The Association has provided the DTI with information on these matters and would be happy to supply the DTI with any further details required.
(b) Cross-border mergers and building societies
13. The merger and transfer of business arrangements in the 1986 were considered in great detail by Parliament and have been subject to modification from time-to-time in the light of relevant developments. Therefore, it would be very unfortunate indeed if they were to be overturned on the basis of the broad Treaty provisions. However, if the interpretation of the Treaty in the Sevic Judgement is correct, then the Association’s answer to question 3 (paragraph 3 above) in the consultative document is affirmative.
14. However, we believe that – for the reasons stated above - new arrangements, if any, to allow cross-border mergers between UK building societies and other EU corporate bodies should be no less stringent than those that provide for transfers of business under the Building Societies Act 1986.
15. The Association does not currently have any comments on the other questions in the consultation. However, we would be very happy to co-operate with the DTI, and other relevant trade bodies, in examining material details, including - if appropriate - any further examination of the implications of the Sevic Judgement. If the DTI, following further consideration, believes that there is a case for some, but not all, of the types of organisation referred to in question 3 to be included in the implementing regulations, we would be interested in finding out more about the DTI’s thinking, since this could give rise to separate – level playing field - considerations.
Link to BSA Practice Brief - Mergers and Dissolutions
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(C - 411/03) December 2005.
"The decision, which is unsurprising in view of the European Court's recently liberal attitude to the free movement of companies, will have the effect of permitting international mergers in Member States which did not permit them, before the implementation of [the Directive] in such states" - Dr Frank Wooldridge (The Company Lawyer Vol 27: 10).
"It is not possible to state the specific terms on which cross-border mergers may be carried out on the basis of [the Sevic] judgment. The limitations imposed by individual member states must be assessed on compelling general interests, and whether they are appropriate to safeguard these interests and are proportionate" - Lone L Hansen (European Business Law Review Vol 18(1): 181).
"This seens to be a very broad conception of the right to freedom of establishment. The Opinion refers to various cases (Case 63/86 Commission v Italy, Case 305/87 Commission v Greece, Case C-302/97 Kolne, Case C-251/98 Baars and Case C-208/00 Uberseering), but in none of these did I find a similar categorical and broad statement" - Jacco Bomhoff (Comparative Law and Decision Making, December 2005).
Sections 86 - 103, Schedules 8A, 15, 15A, 16 and 17 and various statutory instruments.
