Demerger by separation: new type of business conversion for more efficient restructurings

Until recently, the Company Conversion Act distinguished only two forms of demergers:

• a split-up, where all assets and liabilities of one company (the company being demerged) are transferred to at least two successor companies, and the demerged company ceases to exist
• a spin-off, where the company being demerged does not cease to exist, but a part of its assets remains in the demerged company and another part of the assets passes to at least one successor company.

In both these forms, the shareholders/members of the demerged company become the shareholders/members of the successor company.

In the new form of demerger – a separation – the company being demerged does not cease to exist, but (unlike in a spin-off) the company itself (not its shareholders) becomes the shareholder of the successor company. It is in fact a specific type of contribution into another company.

The amendment introduces two types of separation, while their combination is also possible.
 

A separation with the formation of a new company/companies is essentially a new way of establishing a subsidiary. The newly established company (into which the assets and liabilities are separated) will be fully controlled by the company being demerged, which will become its sole shareholder.
 

• Before the amendment, to achieve such a structure, it was customary to establish a subsidiary company and then transfer the required part of the parent company's assets and liabilities to such empty company (in the form of a transfer of a part of a business or its contribution into the new subsidiary), or to carry out an asset deal (a transfer of individual specific items into the newly established subsidiary). Alternatively, it was possible to set up a new subsidiary and carry out a spin-off with acquisition, whereby the spun-off part of the assets and liabilities was transferred from the parent company to the new company. This option, however, encountered the limitations of the de facto impossibility of setting the decisive date of the conversion retroactively before the date of formation of the new company.
   
• Compared to the previous options, the process of demerger by separation is simpler (no need for a separate step of establishing a new company) and clearer. The newly created company will have the status of a legal successor of the company being demerged with respect to the part of the assets and liabilities being transferred to it within the separation. The rights and obligations (including any rights and obligations arising from labour relations) and contractual relations will also pass on to the new company, and creditors will not be able to plead the transaction’s ineffectiveness. Further advantages for the entrepreneur arise in taxation.

​In a separation with acquisition, a part of the assets and liabilities of the company being demerged is transferred to an already existing company or companies. The company being demerged then acquires a share/interest in that existing company, in the form of shares or units, in exchange for the separated part of its assets and liabilities. This opens a new possibility for structuring acquisitions or joint projects, as companies can contribute a part of their assets and liabilities into another company in exchange for shares in that company, possibly to be followed by a share deal.

Demergers by separation, can only be used for conversions of commercial companies, not cooperatives.

In previous articles, we summarised other legal and tax aspects of company conversions brought about by the legislative amendment.