Forms of reorganization of a legal entity include various options for transactions on the separation and merger of companies. Such transactions may occur exclusively between two or more legal entities. Companies that choose a reorganization often have different motives.
Definition
Reorganization is the process of the termination of the existence of legal entities, in which duties and rights to the company are transferred to other legal entities. The reorganization of legal entities is recorded at the time of registration of newly created legal entities. Forms of reorganization of a legal entity: merger, separation, accession, absorption. Each of the forms has its own nuances and features.
Union
Reorganization through a merger implies the merger of two or more companies into one, while legal entities that merge into one new company cease to exist, and all their rights, as well as obligations, are transferred to a new object, which is the result of the reorganization.
In some cases, the merger procedure requires the permission of a special state body, for example, when combining companies whose total value of assets exceeds 100 minimum wages.
Types of deals
Mergers can also be divided into narrower varieties:
- Mergers for geographical expansion: a combination of companies that produce products of the same type, while at the same time operating in different regions. This transaction provides competitive advantages and additional demand in completely different geographical markets.
- A merger to expand the range of products is an association of companies that produce various products, but which nevertheless have similar characteristics. Such transactions help to expand the range of products, and, therefore, increase the competitive advantage of the resulting structure.
- Actually, a conglomerate merger is an association of companies from completely unrelated and unrelated industries.
Joining
Reorganization by merger means the fact that the legal entity of the merged company is liquidated. All rights, as well as the obligations of the company being liquidated, are completely transferred to the existing organization. During reorganization by way of accession, the existing legal entity does not change its status in any way, only amendments are made to its charter. Most often, such a transaction is conducted between large and small companies.
When registering, the following actions are performed:
- the register is entered into the register on the liquidation of the legal entity that is included in another company;
- changes are registered in the USRLE of the company to which the merger is taking place;
- legal entities are issued documents with amendments to these data;
- documents are issued on the liquidation of the merging legal entity.
Highlight or split
Reorganization in the form of separation implies that a part is allocated from the legal entity, which is subsequently formed into a new legal entity. The original legal entity, from which the part was allocated, continues to exist in the previous regime. Reorganization in the form of separation occurs at the time of completion of registration of a new legal entity.
Conversion
Reorganization through transformation is a transaction in which a legal entity changes its legal form. In this case, the legal entity is first formally liquidated, and then a new one is created in a different format.The reorganization is officially recognized as completed at the moment when the state body registers the newly created legal entity. It is worth remembering that not always a change in the legal model can be considered a form of reorganization: an LLC that becomes an OJSC is not considered such a case, for example.
Deal Classification
There are various signs of transactions, however, experts most often identify the four largest groups of classification signs:
- nature of company integration;
- form of payment and transaction financing;
- participation in the transaction by 3 parties;
- attitude of all participants to the transaction.
Specialists identify reorganization transactions, which vary depending on the nature of the integration processes:
- Horizontal M&A is an association of legal entities represented by companies of the same industry that are engaged in the production of similar or interchangeable commodity items, or which carry out the same production stages. Examples of horizontal mergers include Exxon and Mobil (1999), SBC Communications and Ameritech (1998), and NationsBank and Bank America (1998).
- M&A conglomerate transactions - an association of companies representing various industries without the presence of a manufacturing community. That is, in other words, the absorbing company buys firms in industries that are not related to each other. The merged companies have neither target unity, nor technological.
Motives for conducting transactions
Motives, as well as ways to reorganize the enterprise, may be different for each individual company. Analyzing and systematizing the world experience, the following key motives of the M&A market are distinguished:
- Getting a synergistic effect. The fundamental reason for the restructuring of the company is the desire to obtain, and if possible strengthen, a synergistic effect, in other words, to achieve the complementary effectiveness of the assets of 2 or more companies, the combined result of which far exceeds the sum of the results of individual steps of these companies.
- Diversification of production or, in other words, the ability of companies to use excess resources. The procedure can help stabilize the flow of revenue, which is beneficial to all parties to the market: company employees, suppliers, consumers.
- Complementary resources. Companies with complementary resources after the merger will have a higher value compared to the sum of their individual costs before the merger, since after the transaction each company acquires the missing component, and gets it cheaper than when created independently.
- The motive of monopoly. The merger, primarily of the horizontal type, allows manufacturers to cope with price competition, however, the state's antitrust policy limits attempts to merge legal entities if their clear intentions are revealed, consisting in the desire to increase prices. Modern history knows cases when competitors were acquired by a company and subsequently closed, because it is more profitable to buy them out and eliminate price competition, since a drop in the price below the border of average variable costs would lead to significant losses.
- Tax motives. Current tax laws sometimes incentivize M&A transactions. Companies may receive tax cuts, as well as sometimes tax breaks. For example, a highly profitable company, which exists under the pressure of a high tax burden, makes a “horseback ride” by acquiring a company for which tax incentives are available, and subsequently they will be used to create the corporation as a whole.
- The difference in the market price of the company. Sometimes it’s easier to buy an existing business than to start building a new one. This position is appropriate when the market valuation of the property complex of the target company is significantly less than the cost of replacing its assets.
Reorganization Ways
The use of one of the forms of reorganization of a legal entity can be chosen by companies both on a voluntary basis and on a compulsory basis. If everything is generally clear with the voluntary organization, then the compulsory reorganization may be caused by a decision of the court, as well as of state bodies. The company can also avoid liquidation if it takes advantage of the reorganization.
Regardless of what form of reorganization, legal entities conduct a transaction, it is considered completed at the time of registration of a new legal entity, or amending the documents. It is also worth mentioning some limitations. Transactions on the reorganization of the company can only be carried out between legal entities. The form of reorganization of an LLC into an IP is not possible, since the latter is considered an individual.