Transactions with trading companies - mergers and divisions

MERGERS BY ACQUISITION AND CONSOLIDATION

The essence of a merger by acquisition is the combination of several companies, resulting in the creation of a new entity (simply put, it is a situation where a new company C is created by the merger of companies A and B).

In contrast, in the case of a merger by consolidation, one or more companies are dissolved and their assets are transferred to the successor entity, which continues to operate. This situation could be expressed as a merger of companies A and B in such a way that company A ceases to exist and all its assets and liabilities are transferred to company B, which continues to operate.

DOMESTIC AND CROSS-BORDER MERGERS

In addition to mergers, there is also a domestic merger (only entities with their registered office in the Czech Republic will participate in the merger) and a cross-border merger, where a Czech entity is merged into a foreign entity or vice versa.

In principle, cross-border mergers are only possible within the EU due to the harmonisation of the related legislation. While cross-border mergers from/to other countries are not impossible, they will be highly problematic due to the absence of the necessary legislation.

DIVISION OF COMPANIES

The opposite of merging companies is splitting them up. Here a number of variations can occur, in particular the following:

• a spin-off with the formation of a new company or companies;
• spin-off by merger (the spun-off part is at the same time merged into another company);
• a split with the formation of a new company or companies;
• demerger by merger (the demerged parts are merged into other companies).

RULES FOR COMPANY CONVERSIONS

Conversions are subject to a number of rules. One of them is that it is not possible to combine a limited liability company (joint stock company, limited liability partnership, cooperative) and a partnership (public company, limited partnership). Only the same type of partnership can ever be combined.

The entire transaction must be described in a so-called conversion project, which includes, among other things, information on the ownership structure after the conversion, the way the business assets will be linked and, in particular, the decisive date of the conversion.

The record date is quite crucial from an accounting and income tax perspective. From this date onwards, the parties to the conversion act as if the conversion had already taken place (de facto accounting merger). By contrast, the date of registration of the conversion in the commercial register is relevant for the legal consequences of the conversion.

There is always a lot of work behind such transactions. In addition to management, which often prepares the conversion project, lawyers, accountants, auditors and tax advisors are involved in the entire process. Given the extensive economic and legal implications, no part of the conversion should be underestimated.

Are you considering a company transformation, but don't know what to do? Do not hesitate to contact us and our team will guide you through all the potential pitfalls.