Merging of Companies under the Companies Act, 2014

October 2018

A merger in Irish law occurs where two or more companies are combined into a single legal entity and the other company or companies cease to exist without going into liquidation.  Before the Companies Act, 2014 (the “Act”) there was no specific provision for two Irish incorporated companies to merge other than by way of scheme of arrangement which required an application to the High Court.  Chapter 3 of Part 9 of the Act introduced three relatively streamlined and cost efficient options for Irish incorporated companies to merge:

  • Merger by Absorption – a company transfers its assets and liabilities to its wholly-owned parent company.
  • Merger by Formation of a New Company – two companies transfer their assets and liabilities to a third newly formed company.
  • Merger by Acquisition – one company acquires all the assets and liabilities of one or more other companies which are then dissolved without going into liquidation in exchange for the issue of shares by the acquiring company.  The acquiring company issues shares to the members of the transferring company in exchange for the transfer of the transferring company’s assets and liabilities.

Mergers under the Act have proved popular with hundreds of companies availing of the new procedures.  The best option will depend on the position of the two companies in question.  A Merger by Absorption is the simplest but is limited to a company transferring its assets to its parent company.  Merger by Formation of a New Company requires the incorporation of a new company and the transfer of two companies’ assets to the new company and it is not the most popular route.  This article focuses on Mergers by Acquisition.

SAP or High Court

A Merger by Acquisition must take place by using either the Summary Approval Procedure under the Act (“SAP”) or by seeking High Court approval.

The High Court approval option is more cumbersome; it is the slower of the two options (it could be expected to take several months) and is more expensive.  The reason some companies may choose the High Court option is if, for example, the companies to be merged cannot obtain unanimous shareholders’ approval or if a director is unwilling to sign the Declaration of Solvency (see below).

SAP Steps

The following are the main documents required for a Merger by Acquisition using the SAP procedure:

  • Draft Common Terms of Merger. This sets out details of the merging companies and the terms on which the merger will take place.  The Act sets out what should be contained in the Draft Common Terms of Merger and includes details of both companies, the share exchange ratios, the effective date and information on the assets and liabilities to be transferred to the successor company
  • Declaration of Solvency. This is made by a majority of the directors and provides that the company can pay its debts and liabilities as they fall due (see below)
  • Supplemental Directors’ Document. This sets out the effect of the Merger
  • Unanimous Shareholders’ Written Resolution. This is to approve the merger, and
  • Board Minutes.

Directors’ Liability

If the company (following the merger) is wound up in the 12 months after the date of making the Declaration of Solvency and its debts and liabilities were not discharged in full within that period a presumption arises (until the contrary is shown), that the directors made the declaration without reasonable grounds for the opinion.

If a director is found to have made the declaration without having reasonable grounds for the opinion, the Court may, on the application of

(i)         a liquidator, creditor, member or contributory of the company; or
(ii)         the Director of Corporate Enforcement,

declare that director shall be personally responsible without any limitation on liability for the debts or other liabilities of the company or the successor company.

There are also criminal sanctions under the Act for the making of an untrue statement in merger documents by a director.  This would be a Category 2 offence under the Act which carries with it on a conviction on indictment a term of imprisonment of up to five years and/or a €50,000 fine while a summary prosecution for a Category 2 offence can result in a Class A fine (up to €5,000) and/or a term of imprisonment of up to twelve months.

It is therefore very important that the directors signing the declarations are fully satisfied of the solvency of the relevant company.  In order to satisfy themselves of this, it would be recommended that before signing the Declaration of Solvency the directors carefully review the audited accounts, the management accounts, the company’s bank statements and seek the advice of the company’s accountants.

What we can do for you

We can assist you in carrying out a short due diligence exercise to establish which method under the Act is most appropriate for the merger. We can also prepare the necessary documents for the merger and advise the directors and shareholders of the company on the process.

For more information, please get in touch with your usual Whitney Moore contact, Brendan Ringrose, Fiona Brennan or any member of our Corporate team.

 

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