Dr. Barbara Mayer, Fachanwältin für Handels- und Gesellschaftsrechtjan barth gesellschaftsrecht a.jpg

Brexit: Corporate Law, Cross-Border Mergers and Acquisitions

1. Corporate Law: Game over for “German” Ltd. and the “Ltd. & Co. KG”?

Corporations established under a foreign legal system are generally not recognized as such by German law when they relocate their effective head office to Germany. Lacking recognition as a corporation, German law treats the relocated entity as a mere partnership – resulting in the personal liability of the shareholders.

With a cascade of decisions the European Court of Justice has overruled this German “real seat” rule in favour of the free movement of corporations within the EU. Once a corporation has been established under the law of a member state, it can relocate its head office outside the jurisdiction of its establishment without the consequences laid out above. At the height of the boom of the “German Limited” (and before the ensuing reform of the German law), over 40,000 companies made use of this EU-exception, operating their German business by means of a British (usually English or Welsh) Ltd. or PLC with its registered office in the UK and a branch office in Germany – the effective head office.

Depending on the shape and form any Brexit will take, this practice would be shut off. Should the UK exit the EU as well as the European Economic Area (EEA), the freedom of movement would cease to apply to UK corporations. The continued operation of business out of an effective head office in Germany would then be considered a relocation under German law. And as no foreign corporation fulfils the specific German regulatory requirements, provisions must be made in time to prevent the personal liability of the shareholders.

While seeming the obvious solution, simply transferring the business from the Ltd. onto a German GmbH does not entirely solve the problem. The Ltd.’s payables remain with the Ltd., resulting in the shareholder’s liability, and undisclosed reserves within the Ltd. usually have to be disclosed.

The solution lies in another perk of the EU’s single market. The 2005 Merger Directive allows for the cross border merger of corporations from different EU and EEA member states. Under its regime, the aforementioned UK companies can be merged onto or transformed into a German GmbH or Aktiengesellschaft (or a Dutch B.V. etc.), preserving the limitation of liability post Brexit. Seeing as such a merger or transformation respectively usually takes some time for preparation and execution, and bearing in mind that the Merger Directive will most likely cease to apply after a Brexit, the companies concerned will have to initiate the necessary provisions in due time. The solution, while effective, thus has a best-before date.

German businesses operated out of a Ltd. & Co. KG or PLC & Co. KG ultimately face the same problem. Roughly 3,000 companies are operated as Ltd./PLC & Co. KGs – Air Berlin PLC & Co. Luftverkehrs KG and the chemists’ chain Müller Ltd. & Co. KG are prominent examples. While the business as such is run by the German KG (and not the UK corporation), the sole purpose of the UK corporation will usually be the provision of a limitation of liability for the KG. Without more than a PO box in the UK, the corporation would be considered to have relocated to Germany after the depicted Brexit – with the shareholders being liable for the KG’s payables. The safest way to avoid this liability again lies in merging the Ltd. or PLC with (or converting it into) another non-UK corporation securing a limitation of liability post Brexit. 

2. The (very near) future for cross-border M&A

Not only the actual Brexit but also the referendum result will noticeably affect M&A transactions concerning UK companies. The uncertainties regarding the choice of UK law or a place of jurisdiction in the UK (among others the uncertainty as to how British law will develop without the EU’s legal framework) will make such choices less likely. It must be highlighted, however, that not all aspects of M&A transactions are subject to a choice of law. Usually, the law governing the in-rem consummation cannot be agreed upon and is most often governed by the company statute, i.e. the law applicable at the head office of the target company.

Post-Brexit uncertainties regarding the development of UK law must be considered and provided for. The same goes for another governing factor when doing (M&A) business with the UK: the exchange rate between the Pound Sterling and the Euro. In light of recent developments it seems advisable to explicitly structure an M&A deal by including so called Material Adverse Change (MAC) clauses, allowing parties to adjust the conditions of or entirely withdraw from a contract under certain circumstances. To take effect, MAC clauses should be rather fine-grained, defining which changes are to be considered material and matching each material change with a contractual remedy. Changes in the law governing the deal can thus be cushioned as well as a further devaluation of the Pound.

A final consideration point post-Brexit must be merger control. Today, approval for the amalgamation of companies from different EU states can be obtained by the EU commission as a one-stop shop, if the market importance of the companies involved exceeds a certain threshold. After a withdrawal from the single market, an EU-UK merger would require two separate approvals, adding national UK proceedings to the timeline and the cost account of the deal.

Barbara Mayer
Jan Barth

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