Means to act in an economic world.
There are several ways to act in an economic world: from simple agreements to operate a market, dividing it by specialities, intermediate options such as consortia, and joint ventures, up to a formal concentration, resulting in a merger. The means to achieve a corporate structure and the desired position of assets may be obtained by various systems, from the simple partial or total transfer of goods, the liquidation or integration under merger or split-off or the combination thereof in simple or multiple and complex processes.
As to mergers, a company is enlarged to absorb other or others, obtaining a juridical unity thereof, with an absolute and irreversible character. Companies become unified and mixed up and one or more companies disappear. By means of a merger, a company known as absorbent absorbs the patrimony, assets and liabilities of one or more absorbed companies, thus consolidating into only one entity. The absorbent company will assume the obligations and rights of absorbed companies in their integrity. Shareholders of an absorbed company receive, by virtue of the merger, shares and corporate rights of the absorbing company.
Although a merger may be made in different forms, it is estimated that mainly four types may be considered, to wit: statutory merger, creation or combined merger, improper merger and the acquisition of all the stock of a company.
The statutory merger takes place when a company absorbs another, including its patrimony, associates and the aggregate of rights and obligations of the absorbed company. Reference may be made to one or more absorbed companies. This type may also be known as incorporation.
Within the merger by creation or by combination, two or more companies are dissolved to further create a new company.
The improper merger appears when a company is created to continue the business of another dissolved company. However, the doctrine, in general, criticises the denomination of this figure, and its situation within the classification of a merger, because its characteristics differ. Acquisition of 100% of the stock of a company and further merger, is a figure derived from the Financial Statute.
Split-Off
Split-off is a figure contrary to that of a merger and signifies fractioning a company in several companies. By virtue of a split-off, one or several split-off companies transfer part of their assets and the correlative patrimony to one or more beneficiary companies, which form as to the latter, a concentration of patrimony and goods. Companies to be split-off, known as split-off companies, keep their juridical existence, although there are cases in which by splitting-off the totality of the patrimony and assets, they expire, by dissolving without liquidating.
Among the split-off types foreseen in legislation, split-off by absorption is provided, wherein a company without dissolving, transfers part of its patrimony as a whole to one or more existing companies.
As to split-off by creation, a company without dissolving, devotes part of its patrimony as a whole to one or several companies to be incorporated. Other types of split-off appear; for instance, whenever a company that is dissolved, without being liquidated, divides its patrimony in two or more parts to be transferred to several existing companies or whenever a company being dissolved, without being liquidated, divides its patrimony in two or more parts intended to create new companies.
Implications And Projections
A merger and a split-off have a series of implications, of different nature, that may be condensed in the manner indicated in the diagram.
The economic and financial aspects must be examined in a special manner and should not only cover the present moment, but also should reflect the future. Therefore, profit projections are essential, and, in general, financial statements with projections to the future to estimate the results thereof in periods of usually five or more years. To accomplish this, current commercial and statistical methods applicable to the nature of the business are employed.
Appraisal of the companies, as it is obvious, represents one of the most important aspects of company reorganisation which, furthermore, is related to the terms of exchange of shares and corporate rights, because it must be established that no shareholder may be affected in its patrimonial level.
A thorough analysis of national and international markets must be carried out to learn about the means wherein action will be taken and which may be the consequences of the operation. Likewise, based on the projection, definition of the distributions of dividends and future participations must be defined, wherein the new structure will incur.
Definition of the juridical form is indispensable when a study of the company's reorganisation is carried out, because it must be indicated precisely whether forms of transfer of goods or of shares and corporate rights will be used, if the system to contribute goods to a company already existing or to be created will be used, or if it operates through a merger of a split-off, because the legal scopes are quite different in each of such figures.
Whenever a merger or a split-off are adopted, it is necessary to establish the terms of the agreement or of the respective project, complying with all legal formalities. Loan agreements must be reviewed to establish a strategy before creditors who will be informed of the intention to carry out the operation. Issuance of bonds is most important, because certain requirements established by the Susperintendency of Securities must be fulfilled, as well as those contained in the issuance prospect and regulations.
The legal effects of a merger and of a split-off require special analysis because of the effects as to the ownership of the goods and to bear in mind the special modalities and registrations required by some, such as registrations with the office of public and private instruments, the chamber of commerce, shareholders and partners books, traffic inspections, etc.
Frequently, when a merger process is carried out and when a split-off process is carried out with concentration, significant variations in the share composition determining the relationship of parent company and affiliate may occur and, should there be a purpose and direction identity, the presence of a company group. Furthermore, a study of labour implications, particularly those related with the unity of the company, must be studied.
As in any negotiation, the study of tax implications is very important, because it is not sufficient to know that for tax legislation, a merger and split-off, does not imply a transfer. Furthermore, it is important to make an appropriate planning of the absorbing or beneficiary company and of the absorbed or split-off companies, to review the effect of advance payments, accounts in favour of the tax administration, accrued losses, presumptive income, tax discounts, etc.
Planning should be oriented not only to participant companies, but also to shareholders and partners of split-off and absorbed companies and the scope of the analysis should cover income taxes, VAT and industry and commerce taxes. Tax obligations of absorbed and split-off companies correspond to absorbing and beneficiary companies, therefore, all formalities before tax authorities must be complied with.
Any split-off and any merger is based on financial statements furnished complying with all legal requirements. Such statements cannot date back to more than one month to be considered in merger and split-off processes, a term much too short, due to which it requires an efficient and quick task on the part of the companies.
The date of registration of a public deed formalising the operation, marks the time whereat changes will have effect amongst third parties, but internally, the date when accounts are cut is of the greatest importance because it represents the date on which accounting amendments are made, a date that may differ from the date on which the merger and the split-off are completed.
The effects of the consolidation of financial statements, the application of the participation method and of the commercial credit, require special attention, as well as the implications as to when it is necessary to submit balance sheets pursuant to accounting principles other than those of Colombia, as is the case of GAAP in the United States.
* Article taken from the periodical "Ámbito Jurídico" of April 24, 2001.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.