Unit 7: Capital Companies - Structural Changes and Company Termination

Introduction

This unit covers essential aspects of structural changes in capital companies, along with the dissolution, liquidation, and termination processes. Understanding the legal procedures and implications is crucial for the Bachelor in Business Administration (BBA) students studying Business Law for the year 2024-25.

Structural Changes: General Procedure

Structural changes in companies have significant legal and financial implications, affecting both internal and external relationships. The legal framework governing these changes is detailed in Real Decreto-ley 5/2023. Key types of structural changes include transformations, mergers, divisions (demergers), global assignments of equity and liabilities, and international transfers of the registered office. Each of these acts involves specific legal procedures designed to protect stakeholders.

1.1 Types of Structural Changes

• Transformation: This involves changing the corporate form without altering its legal nature (e.g., LLC to PLLC). This process may involve adherence to specific regulatory requirements to ensure that the transformation does not adversely affect creditors or shareholders.

• Merger: A more complex process where two or more companies integrate into one, with varying effects on their individual legal standing and assets. The merger can be strategic for achieving growth or enhancing operational efficiency.

• Division (Demerger): The process of splitting a company's assets and liabilities into two or more entities. This can be used to streamline operations or focus on core business areas.

• Global Assignment of Equity and Liabilities: A transfer of all company assets as a unit. This process often requires the consent of all stakeholders and careful assessment of liabilities.

• International Transfer of Registered Office: Moving the company's legal base to another country, allowing it to benefit from favorable regulatory environments or market conditions.

Mergers

Mergers are corporate operations that lead to the termination of one or more companies and the integration of their assets into a new or existing company. Members of merging companies receive shares in the resulting entity based on an exchange ratio that reflects the valuation of the merging entities.

2.1 Types of Mergers

• Merger by Creation: All merging companies cease to exist, forming a new corporation that assumes all rights and obligations. This often requires extensive planning and reordering of business strategies.

• Merger by Absorption: One company absorbs another, incorporating its rights and obligations while the absorbed company is dissolved. This can often lead to synergies and enhanced market competitiveness.

2.2 Legal Procedure for Mergers

The merger process is divided into three phases:

• Preparation Phase: Involves drafting a common merger plan, board reports justifying the merger, and publishing the draft at least a month before the general meetings to allow for stakeholder review.

• Approval Phase: Requires approval from the general meetings of all involved companies, aligning with legal quorum and majority requirements to ensure stakeholder consent.

• Execution Phase: Finalizes the merger through public deeds and registration in the commercial registry, ensuring compliance with regulatory standards.

2.3 Effects of a Merger

Following a successful merger, the former companies are extinguished, with their assets transferred to the newly formed or absorbing company. This results in a universal succession of rights and obligations, whereby the new entity benefits from the combined resources and expertise of the merging companies, potentially leading to increased market share and operational efficiencies.

Division (Demerger)

Division is characterized by the separation of a company's assets into new or existing entities. The division allows the original company to focus on its core operations, while new entities may specialize in specific markets or products. Members of the original company receive shares in proportion to their ownership.

3.1 Types of Division

• Total Demerger: The original company ceases to exist, and its assets are divided among new companies, often leading to a complete restructuring of business units.

• Partial Demerger: Only part of the original company's assets are transferred, allowing it to continue existing with reduced equity but retaining some operational strengths.

• Segregation: Involves transferring assets to a new or existing company while maintaining control over the original company, potentially allowing for focused management of distinct areas of the business.

Dissolution, Liquidation, and Termination

The process of dissolving a company encompasses three phases: declaration of dissolution, asset liquidation, and final termination of the corporate entity. Each phase is critical in ensuring that stakeholders are protected and that legal obligations are met.

4.1 Causes of Dissolution

Dissolution can occur due to:

• Completion of the statutory term of the company.

• Impossibility of achieving the corporate purpose due to market conditions or operational challenges.

• Ongoing financial losses leading to reduced net equity, which may jeopardize future operations.

• Resolutions by the general meeting or paralysis of management, necessitating formal closure.

4.2 Liquidation Process

Liquidation entails settling company debts, compiling an inventory, and distributing remaining assets among members. The liquidators play a crucial role in this phase, overseeing the fair treatment of creditors and stakeholders. Following the completion of liquidation, a request for the cancellation of company registration is made in the mercantile registry, marking the official termination of the company.

Conclusion

This unit outlines critical legal structures relating to the transformation, merger, division, and termination of capital companies. Students must familiarize themselves with the applicable laws, processes, and consequences to manage these changes effectively and to ensure compliance with legal requirements in their future careers in business administration.