Forms of Restructuring
The law on entrepreneurs allows reorganization of an enterprise in three forms: transformation, merger (accession or consolidation) and division (split or spin-off). The decision on reorganization is subject to the notification rules established for liquidation — the path must be transparent from the outset.
In transformation, the company continues, by decision of the partners, in another legal form, and the formation requirements for the new form apply to the transformed company. Personally liable partners of general and limited partnerships remain liable for obligations arising before transformation where the claim matured before it or within 5 years of it.
Merger and Division: the Constructions
In accession, one or more companies, without liquidation, attach to another — the acquiring company — with full transfer of assets and liabilities, in exchange for shares to the partners. In consolidation, two or more companies found a new one to which their assets and liabilities pass by force of law. Participating companies may have different legal forms.
Division proceeds two ways: by split — where the company transfers parts of its assets and liabilities to two or more newly founded or already existing companies — or by spin-off, where one or more companies are separated from it. The registration of the attached or split company is cancelled without liquidation. In a merger the acquirer answers for all prior obligations; in a division the new and acquiring companies are jointly liable for the divided company’s obligations, but that liability is capped by the net assets allocated to them.
Where maintaining the share-exchange ratio is impossible, partners receive cash compensation in addition to shares; in a joint-stock company it must not exceed 10 percent of the value of the shares to be issued. It is impermissible to issue the acquirer’s shares in exchange for shares held by the acquirer itself or a person acting on its instructions.
Decision, Plan and Registration
The decision on merger or division is taken by the general meeting of every participating company; in LLCs, joint-stock companies and cooperatives — by a 3/4 majority of votes, otherwise unanimously. Where shares of different classes are issued, the decision is voted on separately by each class whose rights it affects.
The managing bodies develop the merger/division plan, which at minimum contains the participants’ identification data, the share-exchange ratio and any cash compensation, the conditions of issuing shares, the date from which shares carry profit rights, the accounting consolidation date, the rights of holders of special securities, the benefits of managing persons, and, in a division, the exhaustive description and allocation of assets and liabilities. The draft charter or amendments accompany the plan.
The registration application is submitted to the registering body after 1 month from publication of the plan — the term is not mandatory where all partners waive it in writing. The application is accompanied by the plan, the charter, the general meeting’s decision and, where applicable, the auditor’s report and consents. The merger/division enters into force from the moment of registration, after which reference to invalidation of the decision is impermissible.
Creditor Protection and Share Buyout
Creditors may, within 3 months of registration of the reorganization, demand security for their claims if they prove that the reorganization threatens their satisfaction; the right belongs to creditors whose claims arose before publication of the decision or plan. Holders of securities with special rights must be granted the same rights in the new company, unless a meeting or each holder individually approved the change.
A partner who voted against the reorganization has 20 days from the meeting to apply for buyout of the share; the company pays a fair price, the managing organ decides the price within 20 days of the term’s expiry, and the sum must be paid no later than 30 days from the price decision. A disagreeing partner may apply to court within 20 days of notice; buyout at the court-set price occurs within 30 days of determination, and the reorganization is not suspended during the dispute.
Frequently Asked Questions
Below are the most frequent questions about restructuring.
Which majority is required?
3/4 of votes in an LLC, a JSC and a cooperative; otherwise the unanimity of all partners.
Is transfer possible without liquidation?
Yes — accession, consolidation and division all work without opening liquidation.
Who answers for old debts after a division?
The new and acquiring companies jointly, capped by the net assets transferred to them.
What term do creditors have?
3 months from registration — to demand security, proving a threat to satisfaction.
How does share buyout work?
The dissenting holder demands buyout within 20 days; the price is set within 20 days and paid within a further 30 days.
How We Help on Legal.ge
The lawyers of Legal.ge help you prepare and carry a restructuring: we choose the construction, draft the plan with an exhaustive allocation of assets and liabilities, protect creditor and minority procedures, and carry the registration through. Contact us — one imprecision in the plan delays the whole transaction.