A demerger is often used to prepare for a change of ownership by separating the part of the business that is to be transferred to the new owner. It is important to allow about six months for the division to take place, as the time required for publication in the Commercial Register is more than three months and it may also be necessary to seek a preliminary ruling from the tax authorities on the tax treatment of the division, especially in the case of partial divisions.
For example, in preparation for a generational change, the actual business, or active assets, of a company owned by parents can be separated into a separate company and the passive business assets transferred to another company. After the split, the active business company is passed on to the children who continue to run the business. Dividing the balance sheet in this way reduces the transfer/sale price of the shares.
Often, a similar type of split is also carried out as a pre-transaction to a takeover, in which, for example, real estate, investment properties and investment assets not related to the business, as well as assets used by the entrepreneurs themselves, are separated into another company and the business to be sold into another company.
For the purposes of this article, a division means a division as regulated in Chapter 17 of the Companies Act. A division may take place in whole or in part. In the overall distribution all the assets and liabilities of the company being divided are transferred to two or more receiving companies and the company being divided is dissolved. Partial distribution part of the assets and liabilities of the company being divided are transferred to one or more receiving companies.
In a total distribution, there must be at least two receiving companies, but in a partial distribution, one receiving company is sufficient. The division may take place either in a going concern or in a company to be formed.
You should allow about six months for the distribution to take place, as the time required to notify the Trade Register is more than three months and you may also need to seek a preliminary ruling from the tax authorities on the tax treatment of the distribution, especially in the case of partial distributions.
Total distribution
A demerger is often used to prepare for a change of ownership by separating the part of the business that is to be transferred to the new owner.
The shareholders of the company being divided receive shares in one or more of the acquiring companies or other assets, liabilities or money in exchange for their shares. A global distribution is also a tax-neutral form of distribution if certain conditions are met, including that the ownership structure of the companies being formed is the same as in the company being divided and that no assets of the company are distributed to shareholders or other persons in connection with the division. In legal terms, a total division is considered to be the principal means of division. Its procedures are followed, mutatis mutandis, in the case of a partial division.
Partial distribution
In the case of a partial division, the procedure is the same, but the company being divided is not dissolved. Partial division allows e.g. the transfer of one or more divisions of a conglomerate to a separate company or e.g. the division of production and marketing into separate companies.. The receiving company may be set up in this context, or it may already have other business activities, or it may be a dormant company, a so-called shell company.
A partial division may be effected by reducing the share capital of the company being divided and distributing to the receiving company the assets released by the reduction of the share capital. It is not necessarily necessary to reduce the share capital, but this can also be done by reducing the free equity capital by the net value of the assets to be transferred.
In practice, the way in which a partial distribution is made is often determined by tax legislation, as only a distribution made in a certain way can be accepted for tax purposes. According to the Business Tax Act, in a partial division the business package must be transferred as such and the company being divided must retain at least one business package, i.e. the company being divided must also retain one business package. A business unit is defined as all the assets and liabilities of a part of a company which constitute an autonomous activity, i.e. a unit capable of operating independently.
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Sharing procedure
There are several steps in the process of splitting. At least four months must be allowed for the merger to be processed by the Trade Register. The provisions on division are common to both public limited companies and private limited companies. The provisions of the Companies Act on division are written primarily for public limited liability companies, so the procedures may be excessive for the needs of private limited liability companies. In private limited companies, however, there are many exceptions to these procedures if the shareholders are unanimous, so that, for example, in family companies or other very few companies, the procedures can be made very flexible if necessary.
Distribution plan
The draft terms of division are a key document for a business reorganisation, which the parties to the division must. company boards of directors and on which the whole breakdown is based. The distribution plan must include a number of points, such as:
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- A statement of the assets, liabilities and equity of the company being divided and the factors affecting their valuation,
- a proposal for the allocation of the assets and liabilities of the company being divided to each of the companies involved in the division; and
- A proposal for the envisaged impact of the division on the balance sheet of the receiving company.
Auditor assesses in its opinion whether the draft terms of division provide correct and sufficient information on the criteria on the basis of which the division consideration will be determined and on the allocation of the consideration. In practice, the opinion is an important criterion when shareholder assesses the proposed consideration. In the case of a partial division, the statement to the receiving company must also indicate whether the division is likely to jeopardise the payment of the company's debts.
Call for proposals
On application by the company being divided, the PRH issues a notice to the creditors of the company being divided, stating the creditor's right to object to the division by the deadline. The notice is published in the Official Gazette at least three months before the deadline and registered ex officio by the registering authority. The company must send a copy of the notice to its known creditors at least one month before the deadline.
Creditor protection in the event of a division
The protection of creditors is organised in two ways in a division. The immediate protection of creditors is that any creditor can object to the division by means of a hearing. The position of creditors is also protected by the fact that the companies involved in the division are jointly and severally liable for the debts of the company being divided which arose before the division was registered, unless the creditor of the company being divided has been paid in full.
If the creditor has objected to the division, the registry authority must inform the company without delay. If the creditor objects to the application, the companies must either pay the creditor's claim or provide security for its payment, in the first instance to the satisfaction of the creditor and, in the event of a dispute, to the satisfaction of the court.
The company that becomes the new debtor under the plan of division has primary liability for the transferred debt. The other receiving companies are only secondarily liable. This means that the creditor can only claim payment of the debt mentioned in the draft terms of division from these other receiving companies on the basis of joint and several liability once it has been established that he will not receive payment from the debtor or from the security.
Implementation of the division
The companies participating in the division must notify the register authority of the implementation of the division within six months of the decision to divide, on pain of the division lapsing. The implementation notification shall be accompanied, inter alia, by an auditor's certificate stating that the receiving company has received full consideration for the amount of its equity and a statement on the draft terms of division concerning the assets, liabilities and equity of the company being divided and the factors affecting their valuation. The sufficiency of the assets to be transferred for the payment of the equity capital will be assessed at the time when the notice of implementation is given.
Final accounts
In the case of a full division, the board of directors and the managing director of the company being divided must also prepare, as soon as possible after the implementation of the division, the financial statements and the report on the activities of the company for the period for which the financial statements have not yet been presented to the general meeting, i.e. the final accounts. The final accounts are submitted to the auditor, who must issue an auditor's report on the final accounts within one month.
The effects of the split
The registration of the implementation of a division implies the succession of assets and liabilities and, in the case of a global division, the dissolution of the company being divided and the creation of new recipient companies.
When the division takes effect, the shareholders of the company being divided will be entitled to the division consideration set out in the plan. Shareholders are entitled to receive consideration in proportion to their shareholding. To this end, he will, as a general rule, be given shares in the receiving company as consideration. However, the consideration may also take the form of money, other assets or liabilities.
Jari Sotka
Lawyer, MBA
Tel. 040 544 0610
[email protected]
Amos Attorneys at Law Oy
www.amoslaki.fi
The author has worked as a lawyer and advocate for more than 25 years, focusing throughout his career on preventing and solving legal problems for small and medium-sized enterprises.