Deal Practice: Company Reorganization by Spin-off

Spin-off reorganization is one of various methods of company restructuring in the Czech Republic. This is a sort of conversion in which the dividing firm is not liquidated but instead continues to exist. This type of transformation transfers a portion of the assets of the divided firm to the successor company or numerous successor companies. Shareholders of the divided company typically remain participants and, in most cases, become partners in one or more successor companies.

Spin-off reorganization is a sort of company conversion conducted by corporations or cooperatives that allows for the separation of a collection of assets that will be transferred to the newly formed firm. Property and debts are both assets. The separation process is governed by Law No. 125/2008 on commercial firms and cooperatives transformation, the Civil Code, and Law No. 90/2012 on commercial businesses and cooperatives. Despite some administrative complexity, this is a standard transaction and does not represent anything complicated.

The entire separation process takes time and includes multiple steps. The statutory bodies of the participating corporations function as the guarantors of the entire separation process and create documentation for subsequent approval during the separation procedure. This responsibility may be delegated to another employee of the relevant company or one of the experts (notaries or lawyers). Statutory bodies are responsible for properly planning and carrying out changes.

In short, the separating process works as follows:

• The shareholders’ decision to proceed with the transaction;
• Select a registration date;
• Planning a company spin-off project;
• Accounting responsibilities;
• Preparation of a report on the transformation by the statutory body;
• Publication or disclosure of statutory information;
• Giving information to partners or members of a partnership, as well as participants and parties involved in the transaction;
• Approval for conversion;
• Securing the claims of creditors;
• Submitting an application for conversion registration in the Trade Register or a foreign commercial register (drawing up a notarial company registration).

For the separation process (transformation in general), there are legal dates that must be met in order for the transaction to be completed successfully, and they are strongly tied to accounting duties.

Business Separation Project

The main document for the transformation as a whole is the separation project. The transformation project is created by interested parties and drafted by the statutory body.

The splitting firm must identify in the draft which of its assets and debts are passed to the successor company, as well as which of its workers are transferred to the successor company (if there is an employee transfer). It must also identify the date on which the accounting record for the spin-off company’s portion is transferred to the successor business (the “accounting date”).

The selection of the so-called share exchange ratio, i.e. deciding on the ownership structure of the successor firm, is an equally significant aspect of the transformation process. A founding meeting of the successor firm must also be held as part of the demerger effort. Establishing these facts is critical since the consequences of a merger can be fatal if not done appropriately.

The segment of the company subject to division must be precisely defined in the preliminary terms of the division. Typically, this is accomplished by outlining a detailed inventory of assets, debts, or employment responsibilities that will be transferred as part of the division in either the draft separation document or an accompanying appendix.

Within the preliminary terms of division, you can include references to the most recent regular, extraordinary, final, or interim financial statements prepared prior to the creation of the division draft. Additionally, inventory records of assets can be cited, provided they enable accurate determinations.

Assets and rights registered in the land registry should be clearly specified in the division project, adhering to the provisions of Law No. 256/2013 on the land registry.

Without requesting prior shareholder consent, the company’s governing body creates the division draft.

If the division is based on the entirety of assets and debts (rights and obligations), it is advisable, as a procedural safeguard, to also comprehensively delineate the portion of the divided company that remains with the original entity. This proactive measure helps prevent potential disputes in the future.

The project becomes legally effective only after receiving approval at the final general meeting of participants during the transformation process, with amendments. The project is disclosed or made public during this meeting.

Expert Opinion

The value of the separated portion must be assessed through an expert opinion, particularly to safeguard the interests of creditors. The expert opinion should be prepared by an expert appointed by the court for the specific case.

The court must appoint an expert within 15 days from the date of the application.

Determination of the Share Exchange Ratio

When determining the future ownership structure, the most common scenario is when partners (shareholders) of the dividing company acquire a similar share in the successor company as they held in the dividing company. 

However, the distribution plan may specify an unequal exchange ratio, and this fact may be compensated with an additional payment to the shareholder(s) whose assets decrease due to the determination of an unequal exchange ratio.

Publication of the Project

All companies involved in the project must publish it. There are two ways to publish your work. The first alternative is to deposit the project in a collection of business registration acts; the second is to publish the project in a fashion that allows remote and free access (website).

The project must be placed in the register at least one month before allotment permission and one month after approval if it is published on the website. The allocation will not be registered in the commercial registry if it is not approved.

The draft division must be published in the trade register’s collection of documents at least one month before the separation of the divided firm is approved by the highest body. At the same time, a notice of the project’s publication and notification of creditors’ rights following division must be published in the commercial gazette.

Accounting Date

The pivotal event in the division process is the accounting date, which marks the commencement of the procedures concerning the assets and debts being transferred to the successor company in accordance with the separation plan. However, the legal ramifications of the spin-off only take effect after the division is officially registered in the commercial register.

Due to this, legal fiction is often employed in accounting and profit taxation. The accounting date can be retroactively selected, even on the day of the general shareholders’ meeting where the decision to carry out the spin-off is made. It’s worth emphasizing that the registration date cannot be more than 12 months before the application for registration of the spin-off in the commercial register is submitted. The final deadline for determining the registration date is the actual registration of the spin-off in the commercial register.

The law permits the selection of an accounting date that doesn’t coincide with the typical financial year start and should be no later than the day prior to the division’s registration in the Trade Register. Some authors consider this option primarily theoretical, given time constraints and an increased workload.

Separation Report

After approval, the separation project enters into force and becomes legally binding. Following that, you must prepare a notarial deed of approval.

The statutory body of the divided business must submit a detailed written report on the division in which it explains the proposed division, particularly in terms of the economic ramifications for the divided firm’s participants (shareholders) and creditors.

A division report is not prepared in the case of limited liability firms in which all of the participants are simultaneously managers, or in the case of companies in which all of the participants have decided not to prepare such a report.

Making an Entry in the Commercial Register

An entry in the commercial register gives legal validity to the division by separation. The dividing firm and the successor company jointly file an application with the appropriate registration court for entrance into the commercial register. If the successor company’s registered office is in a different court of incorporation than the dividing company’s registered office, the application may be made in either of those competent courts of incorporation.

Duration of the Procedure

If a company decides to go through the spin-off procedure, it should expect it to take 4 to 6 months in most circumstances. However, this is dependent on other factors, such as the complexity of the conversion project, approval processes, and so on.

Accounting context

The accounting context and obligations associated with spin-offs. These obligations are defined in § 10–§ 13b of Law No. 125/2008. These include the preparation of the closing accounts, the preparation of opening balance sheets for all parties involved in the company, including notes to them, as well as the audit of the closing accounts and, finally, the valuation of assets.

Creditor Protection

The safeguarding of creditors is a crucial aspect to be taken into consideration during the separation process. The division of debts (creditor claims) from assets, the sale of which could potentially ensure the repayment of these debts, poses the most significant risk to these creditors.

Primarily, the legislation stipulates that the separation must not lead to the insolvency of the successor company. In such a scenario, the company undergoing the spin-off remains responsible for fulfilling obligations transferred to the successor company, up to the extent of the equity capital specified in the company’s initial balance sheet after the spin-off. The successor company shares joint and several liability for the debts of the spin-off company, up to the value of the assets it receives.

The spun-off company must also settle debts transferred to the successor company, up to the extent of the spun-off company’s own capital as indicated in the initial balance sheet following the spin-off. Regarding the assets transferred from the spun-off company, the successor company shares joint and several liability for the obligations of the spun-off company.

If the members (shareholders) intend to sell the successor company after the spin-off and wish to mitigate the risk that the separated company may be held accountable for the debts of the successor company due to dishonest actions by the new management, the successor company could, for instance, issue new loans and repay the original ones before the sale.

Another measure to ensure the security of creditors for both the divided company and the successor company is the right to request additional collateral within six months of the division in the event of a decline in the ability to repay the remaining debts.

Sources:

https://www.achourpartners.com/focuses/transakcni-praxe-rozdeleni-odstepenim/

https://is.muni.cz/th/u0xmc/Danove_a_ucetni_aspekty_premeny_obchodnich_spolecnosti_Jiri_Cech_468831.pdf

https://www.epravo.cz/top/clanky/rozdeleni-odstepenim-41243.html

https://www.profispolecnosti.cz/cs/ostatni-sluzby/premeny-spolecnosti/rozdeleni/a-1719/

https://www.fulsoft.cz/33/rozdeleni-spolecnosti-uniqueidmRRWSbk196FNf8-jVUh4EnhEI8yvqwHRCQDUoj8biERrJfTGJxQrnQ/

https://www.pravniprostor.cz/clanky/obchodni-pravo/premeny-obchodnich-spolecnosti-maji-sva-uskali

https://pravniradce.ekonom.cz/c1-39116830-vymenny-pomer-pri-premenach-obchodnich-spolecnosti