The Legal Framework for Reorganizing an Entrepreneurial Company
Merger structuring in Georgia is one of the forms of reorganization of an entrepreneurial company. The law distinguishes three forms of reorganization: transformation of a company; merger of companies — by absorption or by combination; and division of a company — by split up or by spin off. The decision on reorganization is subject to the notification rules established for liquidation, which means that publication and the informing of parties are an integral part of the process. The correctly chosen form determines the final picture of taxes, the transfer of liabilities, and the rights of partners.
Forms of Merger and Their Consequences
In absorption, one or more companies, without opening liquidation proceedings, are absorbed by another — the acquiring — company through the full transfer of their assets and liabilities, in exchange for which the partners of the absorbed companies receive shares in the acquiring company. In a combination, two or more companies unite by founding a new company, to which the assets and liabilities of the combining companies are fully transferred by force of law. Division likewise takes two forms: a split up, where the company transfers parts of its assets and liabilities to two or more newly founded or existing companies, and a spin off, where one or more companies are separated from it. Merger and division are possible even in relation to a dissolved company, provided the distribution of its property among the partners has not yet begun. Importantly, companies participating in a merger or division may have different legal forms.
In a merger, the combined or acquiring company is liable for all obligations of the merged companies. In a division, the newly founded or acquiring companies are jointly and severally liable for the obligations of the divided company, but this liability is limited to the amount of the net assets attributed to each by the division. Upon completion of the reorganization, the registration of the absorbed, combined or divided company is cancelled without opening liquidation proceedings.
Decision Making and the Exchange of Shares
The decision on merger or division is taken by the general meeting of every participating company. In a limited liability company, a joint stock company and a cooperative, the decision is adopted by a majority of three quarters of the votes cast, and in other cases unanimously by all partners. Where a joint stock company has issued shares of different classes and the decision affects their rights, the vote is taken separately for the holders of each class of shares.
The exchange ratio of shares is a central element of the merger plan. Where maintaining the ratio is impossible, partners may receive, in addition to shares, cash compensation — in a joint stock company it must not exceed 10 percent of the nominal value of the shares to be issued to the partners. The law also protects the share structure: it is impermissible to issue shares of the acquiring joint stock company in exchange for shares held by the acquiring company itself, by a person acting on its instruction, or by the divided or absorbed company or such a person acting on its instruction.
The Merger or Division Plan
The plan is developed by the governing bodies of the participating companies and must contain at a minimum: the identifying data of each participant, its legal form, firm name and legal address; the exchange ratio of shares and the amount of any cash compensation; the conditions for the issue of shares; the dates from which the new shares carry the right to participate in profit and from which transactions are treated as those of the combined company for accounting purposes; the rights granted to holders of securities other than ordinary shares and to holders of shares with special rights; all benefits granted to managers, supervisory board members, partners or the auditor; where necessary, the composition of the new supervisory board; and in a division — an exhaustive description and allocation of the assets and liabilities to be transferred, together with the criterion for attributing shares to the partners of the divided company. Draft charter amendments or a draft charter are attached to the plan. If any asset or liability is not attributed by the plan, it is attributed proportionally to the net assets of all acquiring companies, or, in the case of a liability, all acquiring companies answer for it jointly and severally, but not beyond the net assets attributed to them.
Registration and Creditor Protection
The application for registration of the merger or division in the register is submitted to the registering body after 1 month from the publication of the plan; this period is not mandatory where all partners waive the corresponding right in writing. The application is accompanied by the plan, the charter or its amendments, the decision of the general meeting approving the plan together with the minutes, where applicable the decision electing the managers and supervisory board of the newly founded company, the report of an independent auditor, the merger or division report, and, where required by legislation, the consent of a competent state body. The merger or division enters into force from the moment of registration, and after registration it is impermissible to invoke the nullity of the decision.
Creditor protection is precisely defined: creditors of the participating companies whose claims arose before publication of the decision or the plan may, within 3 months from registration, demand security for their claims if they prove that the reorganization jeopardizes their satisfaction. This right belongs also to bondholders unless the reorganization is approved by their meeting or by each holder individually. Holders of other securities with special rights must be granted the same rights in the new company, unless the changes are approved by their meeting or each holder, or unless a buyout right is provided.
Frequently Asked Questions
By what majority is a merger decision adopted?
In a limited liability company, joint stock company and cooperative — by a majority of three quarters of the votes cast; in other cases unanimously by all partners. Where there are different classes of shares, the vote is held separately for each class.
How much cash compensation is possible in a merger?
In a joint stock company cash compensation must not exceed 10 percent of the nominal value of the shares to be issued to the partners; the same cap applies to the value determined by law where the shares have no nominal value.
When does a merger enter into force?
From the moment of registration. The application is submitted after 1 month from publication of the plan, and after registration the nullity of the decision can no longer be invoked.
What rights do creditors have?
Within 3 months from registration they may demand security for claims that arose before publication, if they prove that the reorganization endangers their satisfaction. Bondholders enjoy the same right.
How We Help on Legal.ge
The corporate team of Legal.ge supports the full merger cycle: choosing the form, drafting the plan, preparing meetings, and working with creditors and the registrar. Contact us — we will assess the transaction and plan the path of risk mitigation.