How to carry out a corporate demerger: steps and requirements
Our colleague, María Roldán, a solicitor in the Corporate Law department, previously wrote a piece focusing on the differences between a total demerger and a partial demerger. On this occasion, this article will delve deeper into the concept of the corporate demerger from a practical perspective, with the aim of understanding the documents that must be prepared in order to successfully execute this type of corporate restructuring.
Where is the corporate demerger regulated?
It must be noted that the corporate demerger is not governed by the Spanish Companies Act, but rather by the Royal Legislative Decree on structural modifications of commercial companies (hereinafter, the “Royal Decree”), specifically Articles 4 to 16, which regulate the provisions common to all structural modifications, and Articles 58 to 71, which deal specifically with demergers.
From a tax perspective, the demerger is regulated in Law 27/2014 on Corporation Tax, Title VII, Chapter VII, in Articles 76 to 89.
What is a corporate demerger?
In order to define the concept of a corporate demerger, it is necessary, as explained by María Roldán in the aforementioned piece, to distinguish between a partial demerger and a total demerger. By way of reminder, they may be defined as follows:
- Total demerger:
- The demerged company is dissolved.
- The assets and liabilities are divided into two or more parts.
- A share or quota exchange is required, which may be proportional or non-proportional.
- There is no requirement to transfer an independent economic unit.
- Continuity of the company name is permitted, as provided in Article 418 of the Companies Registry Regulations (RRM).
- Partial demerger:
- No dissolution of the transferor company.
- It is compulsory to transfer one or more parts that constitute an economic unit (a “branch of activity” in tax terminology).
- A share or quota exchange is required together with a reduction of share capital.
- Continuity of the company name under Article 418 RRM is not permitted.
In both cases, the beneficiary company or companies may be either pre-existing or newly incorporated.
Documentation required for a corporate demerger
The regulation of demergers is scarce. In fact, Article 63 of the Royal Decree refers generally to the rules on mergers; therefore, everything provided for mergers would, in principle, also apply to demergers.
However, given the limited specific regulation and the reference to the merger regime, the question arises: what documents must be prepared in order to carry out a corporate demerger?
1. Draft terms of structural modification
The draft terms of structural modification are regulated in Article 4 of the Royal Decree and Article 63, which refers to Article 40, where the contents of the common draft terms of merger are set out. Specifically, the draft must include:
- Identification of the participating companies.
- Indicative timetable of the transaction.
- Implications for creditors.
- Exchange ratio.
- Date of accounting effects.
- Possible consequences of the demerger for employment.
- Certification of compliance by the participating companies with their tax and social security obligations.
In addition, pursuant to Article 39 of the same law, the draft terms must be signed by all directors. If the signature of any director is missing, this must be expressly indicated at the end of the document, stating the reason.
The draft has a validity period of six months.
2. Directors’ report
The directors’ report is governed by Article 5 of the Royal Decree. This article stipulates that the report must be divided into two sections:
- Section addressed to shareholders: this must cover issues such as any cash compensation if a shareholder exercises the right to dispose of their shares or quotas, the exchange ratio and the methods employed for its determination, the procedure envisaged for the exchange, and the consequences of the structural modification for shareholders.
If all shareholders give their unanimous consent, this section of the report may be omitted.
- Section addressed to employees: this must explain the consequences of the transaction for employment relations and, where appropriate, any measures aimed at safeguarding them. It must also detail any substantial changes in the applicable terms and conditions of employment or in the location of the company’s business premises, and, where subsidiaries exist, how the transaction will affect them.
At least one month before the scheduled date of approval of the transaction, both reports —including the shareholders’ section where applicable— must be made available to employees and shareholders alike.
If the structural modification is approved at a universal meeting, the directors’ report addressed to employees on the potential employment consequences may not be restricted to employees only.
3. Demerger balance sheet
The balance sheet is regulated in Articles 43 to 45 of the Royal Decree. In order to carry out a demerger, the balance sheet must be approved, and it may not be more than six months old from the close of the financial year. Otherwise, a new balance sheet must be prepared, dated less than three months prior to the draft terms.
If the company is required to have its accounts audited, the balance sheet must also be audited.
In the case of listed public limited companies, the balance sheet may be replaced by the half-yearly financial report required by the Securities Market Law (LMV), provided it is no more than six months old at the date of the draft terms. This report does not need to be audited.
4. Independent expert’s report
The expert’s report is governed by Articles 6 and 68 of the Royal Decree. It is required where the transaction involves a Public Limited Company or a Partnership Limited by Shares.
The report must contain two sections:
- In the first one, an opinion from an independent expert on the appropriateness of the exchange ratio and, where applicable, on any cash compensation offered to shareholders.
- In the second one, an opinion from the same independent expert on the adequacy of the capital contributed.
Optionally, a third section may be included, in which the expert gives an opinion on the guarantees offered to creditors, if any.
It should be noted that the expert’s report on the cash compensation or the exchange ratio is not required where all shareholders have expressly given their consent.
5. Publication and filing of documents
Once the documents have been prepared, pursuant to Article 7 of the Royal Decree, at least one month prior to the date of the general meeting, the directors must either publish the documents on the company’s website or file them with the Companies Registry of the company’s registered office, unless the transaction is approved at a universal meeting.
Once the demerger has been approved at the general meeting, the resolution must be published in the Official Gazette of the Companies Registry and on the company’s website, or, in the absence of a website, in one of the most widely circulated newspapers in the provinces where each of the companies has its registered office.
However, such publication may be dispensed with if individual written or electronic communication is made to all shareholders and creditors by a procedure ensuring receipt, at the address appearing in the company’s documentation.
6. Notarial deed and registration with the Companies Registry
The transaction must be executed in a single notarial deed granted by all the participating companies. The deed must include the demerger balance sheet, together with confirmation that all statutory requirements have been complied with.
Conclusions on corporate demergers
As can be seen, a corporate demerger, in addition to being complex, may be time-consuming in order to comply with statutory deadlines. However, Article 71 of the Royal Decree provides that, in the case of a proportional demerger, neither the directors’ report on the draft terms nor the independent expert’s report, nor the demerger balance sheet, are required.
Furthermore, where resolutions are adopted unanimously at a universal meeting, the statutory deadlines would be significantly shortened.
Do you need advice? Access our area related to corporate demergers: