How to proceed when splitting a company

In addition to the new regulation of the transformation (merger) of companies, Act No. 309/2023 Coll. on Transformations of Companies and Cooperatives and on the Amendment of Certain Acts (hereinafter referred to as the "Act") also introduces a new regulation on the division of companies from 1 March 2024.

Last time we brought you an article on the transformation of a company in the form of a merger. Today, in our article, we will focus on the transformations of companies in the form of divisions.

Transformation Project - Division

Division in the sense of the law means splitting up or spinning off. Splitt-up is a procedure in which the company being divided ceases to exist and its capital is transferred: a) to other pre-existing companies, which thereby become the legal successors of the dissolved company ('division by merger'); b) to newly established companies which, by their establishment, become the legal successors of the dissolving company (hereinafter referred to as "division by merger"), or c) by combining the forms referred to in points (a) and (b).

Spin-off is a procedure in which the company being divided does not cease to exist and the part of the company's capital specified in the transformation project passes: a) to one or more pre-existing companies ('spin-off by merger'); b) into one or more newly formed companies ('spin-off by merger'), or c) by combining the forms referred to in points (a) and (b).

From 1 March 2024, when splitting a company, the law comes up with completely new institutes, namely the spin-off of a company and a cross-border division of a company, which are applicable only to limited liability companies and joint-stock companies.

As with a merger, a key document is needed for the split, namely the transformation project.

Individual steps of the transformation project in the form of division:

1. Preparation of a project proposal for the transformation of a commercial company.
2. Notification to the tax administrator on the preparation of a proposal for a transformation project.
3. Notice to creditors and pledged creditors on the preparation of a proposal for a transformation project.
4. Publication of the draft transformation project in the Commercial Bulletin or deposit in the Collection of Deeds in the Commercial Register.
5. Approval of the transformation project proposal by the general meeting of the company.
6. Auditor's report.
7. Filing a proposal for the registration of the company's transformation in the Commercial Register.

Preparation of a project proposal for the transformation of a commercial company

The transformation project in the form of division must contain the following general elements:

• business name, registered office and organisation identification number, if assigned, of the participating companies;
• the proposed business name, registered office and legal form of the company to be established as the successor company;
• the shares of the shareholders of the participating companies in the successor company or the amount of the shareholders' contributions in the successor company;
• determination of the date from which the acts of the merging companies are considered to be acts performed on behalf of the successor company from the point of view of accounting, which date may be determined at the earliest retrospectively to the first day of the accounting period in which the draft transformation project is prepared, provided that the financial statements prepared on the day preceding that date have not been approved by the competent authority,
• determination of the date from which the shareholders of the dissolved companies acquire the right to a share in the profits as partners of the successor company,
• the designation of the shareholders of the company dissolved by the transformation, who become partners of the successor company upon its dissolution.

A mandatory annex to the transformation project is the draft memorandum of association (memorandum of association) and the articles of association of the successor company.

In addition to the general requirements, the transformation project of a limited liability company must be governed by specific elements:

• a precise description of the shares and the determination of the parts of the business assets and liabilities of the company being divided that are transferred to the individual successor companies and, in the case of a spin-off, also a precise description of the shares and the determination of the parts of the business assets and liabilities of the company being divided that remain with the company being divided,
• the rules for the distribution of shares of individual successor companies among the partners;
• determination of the shareholders of the company being divided who become partners of which successor companies by splitting,
• in the case of spin-off, the determination of the shareholders of the company being divided who remain partners of the company being divided and the determination of the partners who become partners of the successor companies,
• identification of employees who become employees of which successor company by splitting,
• in the case of spin-off, the determination of employees who remain employees of the company being divided and the determination of employees who become employees of which successor company.

The proposal for the transformation project must be drawn up by a notary in the form of a notarial deed.

Transformations of companies in the form of a division are decided by the general meeting of the company, unless the memorandum of association stipulates otherwise, and a notarial deed must also be drawn up of such a decision.

In the case of a transformation project in the form of a division, the procedure is similar to that of a merger (merger) of a company.

After the preparation of the transformation project, the statutory body of the company being divided is obliged to notify the relevant tax administrator of the information on the preparation of the draft transformation project within the statutory deadline. Together with the notification to the tax administrator, it is necessary to inform all creditors and lien creditors, or partners or shareholders of the company being divided, about the intended division of the company.

As in the case of a merger, the management bodies of the company being divided are obliged to publish the draft transformation project in the Commercial Bulletin, or to replace this obligation by depositing the draft transformation project in the Collection of Deeds in the Commercial Register.

Before filing a proposal to register the division of a company in the relevant Commercial Register, the dividing company is obliged to have an auditor's report prepared. You can read more about the preparation of the auditor's report and more details about the individual steps in the article Internal Transformation of Companies and Cooperatives – MERGER.

Do you intend to split your company? Or do you need to do a merger of companies? Book a consultation with our specialists.