Is a merger or a demerger a part of your agenda for the in the near future or do you have hands-on experience from restructurings you have already performed? Should that be the case, you need to address your future experiences taking into consideration the newly amended law regulating this area which came into force on 1 January 2012 – the amended Act No. 125/2008 Coll. (the „Amendment“).
Although it is only an amendment to the law, it has brought about significant changes affecting various areas.
What is the right time for a valuation in mergers?
Before the amendment took place, the law stipulated specific situations where a valuation was necessary – i.e. issuing new stocks/shares to the shareholders or members of a company undergoing dissolution of a company or demerger. However, the Amendment states that the valuation of property is necessary where a company is undergoing a dissolution within a merger or a demerger and the assets of the company in dissolution increase the authorised capital of the succession company.
Merger of Parent Company and Subsidiary?
The Amendment regulates also the merger of a parent company and subsidiary. If the parent company becomes a succession company, its authorised capital shall only be increased by the difference between valuated assets and the purchase price of the share in the subsidiary owned by the mother company. On the other side, where the subsidiary becomes the successor, the value of the assets of the mother company (undergoing dissolution) shall be reduced by a fair value of the share in the succession company owned by the company in dissolution.
This regulation applies also to cases where a parent company and subsidiary cease to exist within a merger into a third, either existing or newly created succession company.
There is no doubt that the amended regulation aims at avoiding authorised capital being “inflated” two-fold including the value of assets.
What is the Right Date for a Valuation in a Merger?
Compared to previous regulation stipulating that the assets of a company in dissolution within a merger shall be valued as of the day preceding the decisive day of the merger, from 1 January 2012 the valuation has to be performed as of the date of the final financial statement, both regular and extra-ordinary, which needs to be issued before the project for a merger is finished.
The Amendment allows the decisive day to be determined after the project for merger was finished, i.e. as of the date of entering the transformation in the Commercial Register. In such cases, revaluation of the individual assets and liabilities included in the valuation for the purpose of determining the amount of increase in the authorised capital of the succession company would be out-dated and therefore irrelevant accounting. Should this happen, it will most probably be necessary to perform another valuation as of the decisive day.
Transferring Companies with a High Accumulated Loss Carried Forward?
The Amendment offers the opportunity to allow a transferring company to carry forward any increases in accumulated losses as if they were paid from available sources and that the accumulated loss should reach a minimum of half the amount of the authorised capital. However, the decisive day must not be determined later than the finalisation of the merger project and expert legal opinion needs to prove that the merger does not lead to the succession company´s bankruptcy.
This might apply to companies which have made significant investments in order to create intangible assets which, although being excluded from the financial statements, generate profit in the current period.
Demerger by Spin-off Without Valuation?
Based on the amended regulation it is not necessary to perform a valuation of the assets (expert opinion) for the purpose of a demerger by spin-off on condition that the authorised capital of the succession company is not increased by the assets of the demerged company. This usually happens in intra-group transactions where the activities of the group are restructured.
A disadvantage of this method lies in the value of assets being included only based on its accounting (historic) value which, however, reflect neither their fair value, nor do they take into account numerous intangible assets which are not included in the financial statements (fair value of a trademark, relationships with customers, specific know-how and more).
An advantage and disadvantage of this method might be that if no expert opinion is executed in order to assess the value of the assets transferred to the succession company, all the succession companies have to meet, jointly and severally, the liabilities of the demerged companies which were transferred into the succession ones or remained with the demerged company. Successors are liable up to the amount of the actual assets included in the opening balance sheet. In the opening balance sheet of the succession company, the actual capital created by the spin-off and the original capital count together. If the original actual capital of the succession company is positive, the liabilities of the demerged company will be subsequently settled. The same applies to the demerged company which has to meet the liabilities which were transferred during the spin-off to the succession company up to the amount of its own actual capital reported on the opening balance sheet.
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