In the last couple of years, the English court has been prepared to allow solvent schemes for companies incorporated in many other EEA jurisdictions

Run-off is big business. In the London Market alone, the total liabilities of the non-life run-off market are estimated at £38.4 billion, which represents approximately 23 percent of the non-life market as a whole.

However, run-off opportunities are not limited to the London Market. Many other countries have huge volumes of business in run-off, even if there is traditionally less trading than in London. The ability to move business around allows the run-off company to select the best environment for run-off or exit in its particular circumstances. For example, solvent schemes are very popular in the London Market (and explained further below) are also available in some other EU jurisdictions, such as Ireland (where Colonia successfully promoted a scheme in 2005), Gibraltar, Cyprus and Malta.

All EEA jurisdictions observe the EU minimum standards, but there is a wide variety of regulatory and capital requirements across the EEA, so some jurisdictions are more attractive than others.

It is now easier than ever to move books of business from one jurisdiction to another within Europe. There are an increasing number of tools to do this, which will be looked at in this article, but they are not straightforward and a number of factors have to be taken into consideration.

The Portfolio Transfer (known in the UK as a Part VII Transfer):
The European Insurance Directives require each EEA State to establish a regime to enable insurers with their head office in that country to transfer all or part of their insurance business to any other insurers established within the EEA.

However, the Directives do not prescribe detailed requirements for portfolio transfers, which are left for individual EEA States to determine. Regulators want to be satisfied that the transferee company meets all capital and solvency requirements and that there will be no detriment to policyholders on the transfer. There could also be significant tax consequences under the relevant national tax laws.

In the UK, the first Part VII Transfer was for business from English companies WASA International UK Insurance Company Limited and AGF Insurance Ltd to WASA International Insurance Company Limited, based in Sweden.

The Single European Company:
The Single European Company Regulation creates a legal framework for a new form of European public company, a Societas Europaea or SE. The Regulation, which came into force in 2004, sets out the core legal framework for the establishment of an SE, including the principles of formation, organisation and transfer of the registered office. It is supplemented by an EU Directive on employee involvement.

The SE was conceived so that a whole group could be governed by a single set of rules, rather than have subsidiaries across Europe in different EU States being governed by differing national laws.

However, there is no uniform SE across Europe; the Regulation only governs certain aspects, the rest being left to national law. Where national laws do not deal specifically with SEs, their normal law on public companies will apply.

For these purposes, there are only two ways of forming an SE: by merger, which entails two or more public companies in different EU States merging to create an SE, which could have its registered office in either country; and by conversion of an existing public company to an SE, which could then be redomiciled in another jurisdiction.

The merger, common in civil law jurisdictions, is often termed a statutory merger. In practice, merger by use of an SE will often necessitate a Portfolio Transfer. In the UK, for example, the statutory process is considered mandatory for transfers of insurance business.

The requirement for employee participation presents a significant complication to forming an SE. The Directive provides for employee participation in both the supervision and strategic development of an SE. In some EU States, there is no equivalent requirement for domestic companies, so this may be seen as an unattractive feature of the vehicle.

German insurer Allianz has recently reached agreement over employee board participation, clearing the way for its conversion to SE status, which has included merging in business from Italy.

The taxation of SEs is not expressly dealt with by the Regulation. An SE will generally be subject to the same tax laws as any other public limited company incorporated in the country in which the SE has its registered office.

Special provisions are contained in the 1990 EU (Tax) Mergers Directive (as amended), which defer or eliminate gains on formation of an SE by merger which may otherwise arise under national laws. However, unless the business transferred remains within the tax net of the jurisdiction of the transferor, the Directive will not generally apply to prevent a tax charge on transfer.

The Cross-Border Mergers Directive:
The Cross-Border Mergers Directive aims to facilitate crossborder mergers between limited companies established in different EU States. It will come fully into force by December 2007.

The Directive applies to mergers between companies that have their registered office, central administration or principal place of business within the EU, provided that at least two of them are governed by the laws of different EU States.

The major difference between the Directive and the SE regime is that an SE merger can only be between EU companies, whereas non-EU companies that have their principal place of business in the EU can use the Cross-Border Mergers Directive regime.

The kind of merger achieved by the Directive is a “merger by fusion”. This can be achieved either by absorption, ie. through dissolution (not the winding up or liquidation) of all but one of the merging companies and the absorption of their undertakings into the remaining company; or by the formation of a new company, ie. all merging companies are dissolved and their undertakings are absorbed into a new company.

Unlike the SE Regulation, the Cross-Border Mergers Directive provides for the rights and protection of employees in the merging companies during the merger to be subject to the relevant provisions in national law. Board participation rights are subject to the rules in the EU State where the resulting company is registered. As in all cases, tax will be an important factor. The 1990 EU (Tax) Mergers Directive may also apply here since the forms of merger contemplated by the Cross-Border Mergers

Directive are also provided for in the 1990 EU (Tax) Mergers Directive. As in the formation of an SE by merger, however, the 1990 Directive requires that the business transferred remains within the tax net of the jurisdiction of the transferor in order to prevent a charge arising on the transfer.

Scheme jurisdiction:
If the business cannot be moved between jurisdictions, it may still be possible to use some of the tools available in other jurisdictions, such as solvent schemes. A solvent scheme is a statutory procedure whereby a company can close its run-off early, paying outstanding claims and commuting IBNR.

The scheme process in England requires approval of a majority of policyholders, representing 75 percent in value of those who vote. Those who fail to vote or vote against will be bound by the majority decision, if the scheme receives court sanction. English solvent schemes are not restricted to English companies. The jurisdiction test has recently been clarified in the Sovereign Life case. In Sovereign Life, the English court held that it had jurisdiction to sanction a scheme of arrangement for an insurance company regulated in an EEA State other than the UK, provided the company had sufficient connection with England eg. a place of business in the UK or the fact that English law governs many of the policies subject to the scheme.

In the last couple of years, the English court has been prepared to allow solvent schemes for companies incorporated in many other EEA jurisdictions, including France, the Netherlands and Norway.

Conclusion:
The new legislation on cross-border movement of companies and businesses presents a number of options for those involved in the run-off market, both in London and around Europe. Expansion of the EU to include new insurance-friendly jurisdictions, such as Malta, increases the opportunity still further.

There are many complex factors to take into account in each individual circumstance, but there has never been a better time to consider these options.

This Special item appeared in issue 110 of JTW News - November 2006

Author: Ian Poynton | Craig Montgomery - Freshfields Bruckhaus Deringer