A structure that worked well at the start of a business may eventually cease to meet its needs. The company expands, merges with a partner, divides its activities, or changes its organizational and legal form.
One way to make such changes is to reorganize a legal entity.
At the same time, reorganization is not just a change in information in the Unified State Register. It is associated with succession, transfer of assets and liabilities, creditors’ rights, labor relations, and tax consequences. In certain cases, it is additionally necessary to take into account the requirements of the legislation on the protection of economic competition.
Therefore, the method of reorganization should be chosen taking into account not only the future corporate structure, but also all the legal consequences of such a decision.
What are the methods of reorganization?
According to Article 104 of the Civil Code of Ukraine, a legal entity is terminated as a result of reorganization by merger, acquisition, division or transformation. In this case, its property, rights and obligations are transferred to the legal successors.
For limited and additional liability companies, these procedures are additionally regulated by the Law of Ukraine “On Limited and Additional Liability Companies”.
Merger involves the termination of several legal entities and the creation of a new legal successor, to which their property, rights and obligations are transferred.
In the case of merger, one or several legal entities are terminated, and their property, rights and obligations are transferred to another, already existing legal entity.
Division involves the termination of one legal entity and the transfer of its property, rights and obligations to several legal successors.
Transformation consists in changing the organizational and legal form of a legal entity. In this case, its property, rights and obligations are transferred to the successor.
How does a spin-off differ from a reorganization with termination?
A spin-off has a different logic: the legal entity from which it is carried out is not terminated.
As a result, one or more new legal entities are created, to which, according to the distribution balance, a certain part of the property, rights and obligations of the original company is transferred. The company itself continues its activities.
In practice, a spin-off can be useful when a business plans to separate a certain area of activity, a group of assets or risks into a separate legal entity, but does not intend to terminate the main company.
At the same time, the legislation establishes special rules for liability for obligations upon spin-off. Therefore, the distribution of assets, rights and debts between companies requires special attention.
Where does the reorganization of an LLC begin?
The first stage is the adoption of a corporate decision.
The decision on the separation, merger, division, accession and transformation of an LLC falls within the competence of the general meeting of the company’s participants.
Even before making such a decision, it is worth determining what the business structure should be after the procedure is completed: which companies are being terminated or created, who will receive the assets and liabilities, what will be the composition of the participants and how their shares will be distributed.
If the reorganization involves the termination of a legal entity, the procedure for conducting the termination and the persons responsible for this procedure are also determined.
In accordance with Article 105 of the Civil Code of Ukraine, the participants of a legal entity, the court or the body that made the decision on its termination are obliged to notify the body exercising state control in writing within three working days from the date of making the decision. registration.
What happens to creditors?
Reorganization does not allow a company to get rid of existing debts. Its obligations are transferred to the successor or distributed between the successors, depending on the chosen method of reorganization.
If the reorganization involves the termination of a legal entity, a period is set for creditors to file their claims. According to Article 105 of the Civil Code of Ukraine, it cannot be less than two and more than six months from the date of publication of the notice of the decision to terminate the legal entity.
For LLCs, a special mechanism for creditor protection is additionally in effect, provided for in Article 55 of the Law of Ukraine “On Limited and Additional Liability Companies”.
Within 30 days from the date of the decision to terminate the company by division, transformation or separation, and in the event of a merger or acquisition – from the date of the relevant decision by the last of the companies participating in the procedure, the company must notify all creditors known to it in writing.
A creditor whose claims against the company are not secured by a security agreement, within 30 days from the date of sending him a notice or from the date of publication of the relevant notice, has the right to file a written request for the application of one of the methods of protection provided for by law. Depending on the circumstances, this may be to ensure the fulfillment of the obligation, its early fulfillment or termination of the obligation.
Therefore, these terms have different purposes: a period of two to six months concerns the filing of creditor claims in the procedure for the termination of a legal entity, and a 30-day period under the Law on LLC/LTD – special means of protection of creditors in connection with reorganization or separation.
Transfer act and distribution balance sheet
One of the main tasks of reorganization is to properly record the succession.
In accordance with Article 107 of the Civil Code of Ukraine, after the expiration of the period for presenting claims by creditors and satisfying or rejecting such claims, a transfer act or distribution balance sheet is drawn up, depending on the method of reorganization.
In the event of a merger, acquisition and transformation, a transfer act is drawn up, and in the event of division, a distribution balance sheet is drawn up. A distribution balance sheet is also drawn up in the event of a separation.
These documents must correctly determine the succession to the property, rights, and obligations of a legal entity.
In practice, this is much more than a formal document for the state registrar. The correctness of its preparation determines who will receive the assets, rights of claim, accounts payable and receivable, contractual rights and other obligations after the procedure is completed.
This becomes especially important during division and separation, when rights and obligations are distributed between several companies.
Is a tax audit mandatory?
Reorganization does not automatically mean a tax audit in every case.
At the same time, subparagraph 78.1.7 of Article 78 of the Tax Code of Ukraine provides for the initiated procedure for the reorganization of a legal entity, in addition to transformation, among the grounds for conducting a documentary unscheduled audit.
Therefore, it is advisable to analyze the company’s tax status before the procedure begins: check the settlements with the budget, the presence of tax debt, tax assets and liabilities, the status of VAT settlements and the features of the transition of the relevant indicators to successors.
Particular attention is required in cases where the reorganization involves the transfer of a significant amount of assets or the division of different business lines between several legal entities.
What happens to contracts?
Thanks to the succession, the rights and obligations of the company that is terminated as a result of the reorganization are transferred to its successor.
However, before starting the procedure, it is worth reviewing the key contracts of the company separately.
Financing contracts, credit agreements, lease agreements, license agreements and large commercial contracts may provide for the obligation to notify the counterparty about the reorganization, obtain its consent or fulfill other conditions in connection with changes in the company’s structure.
Therefore, the presence of a succession does not mean that a contractual audit can be skipped.
What happens to employees?
The reorganization itself does not in itself terminate the employment relationship.
In accordance with Article 36 of the Labor Code of Ukraine, in the event of a change of employer, as well as its reorganization by merger, acquisition, division, separation or transformation, the employee’s employment contract continues.
Termination of an employment contract at the initiative of the employer in connection with such changes is possible only in the event of a reduction in the number or staff of employees in compliance with the procedure established by law.
Therefore, the reorganization itself is not an independent basis for dismissing employees.
State registration of reorganization
The final stage is the completion of the necessary registration actions in the Unified State Register.
The procedure for state registration is determined by the Law of Ukraine “On State Registration of Legal Entities, Individual Entrepreneurs and Public Organizations”.
The specific package of documents depends on the chosen method of reorganization. Depending on the situation, state registration of the termination of a legal entity, the creation of a successor or changes to information about an existing legal entity is carried out.
For the relevant registration actions, documents provided for by law are submitted, in particular, a transfer deed or distribution balance sheet in cases where their preparation is required by law.
Therefore, there is no single universal list of documents for mergers, acquisitions, divisions, separations and transformations – the package is formed in accordance with a specific reorganization model.
Separately, it is necessary to properly resolve the issue of documents that, in accordance with the law, are subject to long-term or permanent storage.
Is permission from the Antimonopoly Committee required?
If the reorganization involves the merger of significant businesses, it is also necessary to check it from the point of view of the legislation on the protection of economic competition.
Mergers of business entities or the merger of one business entity with another are forms of concentration. If the financial indicators of the participants meet the criteria established by Article 24 of the Law of Ukraine “On Protection of Economic Competition”, such a concentration requires prior permission from the Antimonopoly Committee of Ukraine.
At the same time, to determine the need for permission, it is not enough to mechanically compare the financial indicators of only two companies that are directly involved in the reorganization. Antimonopoly legislation provides for taking into account the indicators of the participants in the concentration and their related business entities in accordance with the rules established by law.
Therefore, it is advisable to conduct an antimonopoly analysis at the planning stage of the transaction. If the concentration requires permission from the Antimonopoly Committee of Ukraine, it cannot be completed before it is obtained.
Reorganization or M&A?
Mergers and acquisitions can be used for the legal unification of businesses, however, reorganization should not be identified with M&A.
M&A covers a much wider range of transactions. For example, an investor can purchase 100% of the share capital of an LLC. The owner of the business will change, but the company itself will continue to exist and its reorganization will not take place.
In other cases, the required result can be achieved by purchasing individual assets, creating a joint company, or transferring a specific business line.
Therefore, before starting the reorganization, it is worth first determining the ultimate goal: to merge several legal entities, change the owner of the business, separate the line of business, distribute assets, or change the organizational and legal form.
What should be checked before starting the reorganization?
The most difficulties arise when a corporate decision has already been made, and its legal consequences begin to be analyzed only after that.
For example, the transfer deed is already being prepared, but the loan agreement requires the bank’s prior consent to the reorganization. Or the asset is planned to be transferred to a new company, but such a transfer has tax consequences that were not taken into account during the planning. Otherwise, it may turn out that the planned merger requires prior approval from the Antimonopoly Committee.
That is why, even before making a final corporate decision, it is advisable to determine the succession structure, analyze assets and liabilities, key contracts, creditor rights, labor relations, tax and regulatory consequences.
After this, state registration becomes the final stage of an already prepared procedure, and not an attempt to solve problems in the process.
Conclusions
Reorganization allows you to significantly change the structure of a business while preserving the legal succession: merge several companies, attach one to another, distribute the business between several legal entities, or change the organizational and legal form.
At the same time, its result is determined not only by the decision of the general meeting and the entry in the Unified State Register.
Before starting the procedure, you need to understand what will happen to assets, debts, contracts, employees, and tax obligations, how the rights of creditors will be protected, and whether additional regulatory requirements arise.
Therefore, a properly planned reorganization begins with determining the desired business structure and analyzing its legal consequences. And only after that should you move on to corporate decisions, registration of legal succession, and state registration.
