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18 de April de 2023
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Spin-off of commercial companies

[vc_row][vc_column][vc_column_text] Spin-off of commercial companies [/vc_column_text][vc_column_text css_animation=""]Renowned jurist Guillermo Cabanellas de Torres defines a spin-off as a change in the structure of a commercial company that occurs when it allocates part of its assets to an existing company; or participates with it, separating part of its assets in the creation of a new company; or […]

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Spin-off of commercial companies

[/vc_column_text][vc_column_text css_animation=""]Renowned jurist Guillermo Cabanellas de Torres defines a spin-off as a change in the structure of a commercial company that occurs when it allocates part of its assets to an existing company; or participates with it, separating part of its assets in the creation of a new company; or when it allocates part of its assets to create a new company.[1]This concept is broad and allows us to understand the cases in which a spin-off is configured. The aforementioned author's definition focuses on commercial companies, but it should be clarified that the concept of spin-off can also be used for public institutions, as has been the case in the country's restructuring of the National Electric Power Company. Despite this, this article will focus exclusively on the spin-off of commercial companies. The legal institution of spin-off has its origins in the phenomenon of corporate concentration in the 19th century, as it emerged as a concept opposed to mergers. This means that, since its inception, there has been a close relationship with the concept of mergers. On the one hand, a merger entails the organization and grouping of large companies, which implies the existence of a group of individual companies participating in the process. On the other hand, a spin-off should be understood as a method of administrative decentralization of large companies focused on specialization. For this reason, a spin-off is also known in some legal doctrine as a reverse merger. There are few references to spin-offs in Honduran law, but there is a legal definition of spin-offs in commercial law. Article 5 of Executive Agreement No. 679-2014[2]defines the split as the“block transfer of a company’s assets to one or more pre-existing companies, or to form a new one.”   Subjective and Objective Elements of the SplitTwo people are involved in the splitsubjective elements:

  1. The splitting company: is the company that transfers one or more blocks of assets.
  2. The beneficiary or spin-off company: is the company that receives the equity block of the splitting company.

Heobjective elementThe asset of the spin-off is simply the block of assets transferred as a result of the spin-off. This block of assets may be:

  1. Positive: when the value of the assets is greater than the value of the liabilities.
  2. Negative: when the value of liabilities is greater than the value of assets.
  3. Symmetrical or balanced: when the value of assets and liabilities is equivalent.

Purposes of the spin-off[3]:The figure of the split has various functions, so, as an example, the following purposes are identified:

  1. To separate the economic activities or productive units of a company, giving them autonomy.This feature allows companies to develop and adapt to markets in completely different regions. One benefit of this feature is cost savings for companies, as it allows them to directly and specializedly manage each production unit.
  2. To separate profitable activities from loss-making ones that require specific attention.This function allows companies to prevent loss-making production units from affecting healthy ones. For this reason, this function is known as a restructuring technique.
  3. To divide the company's assets among the partners.For example, in the case of large companies that constitute family assets; conflicts between partners due to a lack of consensus, among other cases.
  4. To be eligible for tax benefits.This function arises because some tax relief regimes require applicants to be exclusive purpose entities (e.g., in the tourism sector and call centers).
  5. To clean up the commercial imageThis function operates mainly in the case of a total spin-off, since in this case the splitting company ceases to exist.
  6. To correct possible effects on competition.Under Honduran law, the Commission for the Defense and Promotion of Competition may order a spin-off as a corrective measure in the event of an economic concentration, in accordance with Article 19, paragraph 1, of the Law for the Defense and Promotion of Competition.

  Classes of splitting[4]:Generally, splitting is classified into two main classes:

  1. Total split (pure, simple or proper): This involves dividing the entire assets of the splitting company into asset blocks, which are then transferred to two or more spin-off companies. In this case, the splitting company is dissolved through dissolution without liquidation, the purpose of which is to transfer the blocks to the beneficiary companies. Therefore, the beneficiary companies are responsible for continuing the operations of the splitting company, in accordance with their respective asset blocks.
  2. Partial split (improper or by segregation): This involves the segregation of one or more blocks of assets from the splitting company, leaving a portion of its own assets, to be transferred to one or more spin-off companies. Unlike a total spin-off, in a partial spin-off the splitting company does not dissolve, but it is required to allocate its assets as a result of the transfer.

Effects of the split.

  1. Generally, a spin-off involves a proportional reduction in the capital of the splitting company, unless the transferred equity block affects only profits.
  2. The shares in the spin-off company or companies are attributed directly to the partners of the spin-off company.
  3. Unless the articles of incorporation require unanimous votes for the Assembly to adopt the agreement, a partner who disagrees with the spin-off may exercise his or her right to withdraw in accordance with the provisions of articles 317 and 351 of the Commercial Code.
  4. Creditors of the participating companies have the right to object. Exercising this right will suspend the spin-off, unless the creditor's interest is sufficiently guaranteed or payment of the debt is proven.
  5. The spin-off may cause the extinction of the splitting company, which is dissolved without being liquidated.
  6. The spin-off does not impose capital gains tax under Article 14 of Decree 113-2011 – Law on Revenue Efficiency and Public Spending, which was amended by Article 13 of Decree 278-2013.

Differences between spin-off and other legal entities:

  1. Traditional Dissolution and Liquidation – Spin-offIn traditional dissolution and liquidation, the company establishes the mechanism for the liquidation of its assets and appoints a liquidator responsible for closing the company's assets and liabilities; the procedure concludes with the approval and registration of the final liquidation balance sheet. In contrast, in a total spin-off, the spinning company is dissolved without being liquidated, and in the case of a partial spin-off, the spinning company retains its legal personality.
  2. Merger – Total DemergerIn a merger, all the assets are incorporated into a single company (incorporating company), while in a total spin-off, the assets of the splitting company are incorporated into two or more asset blocks in favor of two or more beneficiary companies.
  3. Asset reorganization – Demerger properIn a reorganization, a segregation of equity blocks can occur, just as in a spin-off, but the difference is that the spun-off company is the one listed as the contributor or recipient of the equity shares, not its shareholders. In a spin-off, however, the recipients are the shareholders of the splitting company.

Demerger procedure.Unlike other Latin American countries[5]While the provisions expressly regulate spin-offs in commercial law, there is no specific procedure in our country. Regarding insurance institutions, there are some special rules for spin-offs, but these are logically applicable to the insurance and reinsurance sector. However, Article 41 of the Insurance and Reinsurance Institutions Law is very important for the legal concept itself, as it establishes that“…LThe spin-off will be subject to the same procedure established for the merger.”. Therefore, said regulations establish that the merger rules are applicable to the spin-off and, consequently, a reference is made to Title II, Chapter XI of the Commercial Code. Personally, I consider that these would be the legal basis for the spin-off procedure in Honduras. It is worth mentioning that a certain sector of Central American doctrine maintains that, in the absence of express regulation in a codification or standard, it is possible for the Assembly to adopt a procedure in its statutes.of its kind, as long as the rights of the participants in the transaction or third parties (dissident partners or creditors) are not violated. However, this is not a common practice in Honduras, since companies generally fail to mention this circumstance. Therefore, a sound practice would be to apply the procedure established for mergers in the Commercial Code and the Insurance and Reinsurance Institutions Law, with some specificities developed by legal doctrine specifically for spin-offs. That said, the spin-off procedure includes the following:

  1. Preparation of a demerger project[6](Article 39 of the Insurance and Reinsurance Institutions Law)This document must contain: the reasons for and conditions of the spin-off; the companies involved in the process; the draft amendment to the bylaws or the company's incorporation, as applicable; the description and value of the assets and liabilities that will comprise the equity block(s); a clear description of the stake held by the partners of the spinning company in the beneficiary company(ies); the audited financial statements of all companies involved; and the effective date of the transaction.
  2. Approval of the spin-off project by each company involved (Article 39 of the Insurance and Reinsurance Institutions Law, and Articles 87, 169, 186 and 346 of the Commercial Code).By its nature, this agreement must be adopted under the same rules established in articles 87 or 186 of the Commercial Code, unless the articles of incorporation establish more rigorous rules.
  3. Notarization and registration of the spin-off agreement (Articles 347 and 394 of the Commercial Code)Registration must be completed in the public commercial registry corresponding to the domicile of each of the companies involved.
  4. Publication of the spin-off agreement and corresponding balance sheets (Article 347 of the Commercial Code).The companies involved must publish their latest balance sheet and, for dissolved companies, they must publish the liability extinction system.
  5. Three-month period from publication (Article 349 of the Commercial Code).The purpose of this period is to allow any interested party to oppose the spin-off.
  6. Termination (Articles 349 and 350 of the Commercial Code).The demerger procedure will be completed either:
    1. Because the three-month period has elapsed without any objection being filed;
    2. By a final judgment declaring the opposition unfounded; or
    3. By registering the spin-off agreement, provided that the liabilities included in the split asset block have been paid, that a corresponding deposit has been made in a credit institution, or that the consent of the creditors is recorded.

At Lexincorp, we can advise you if you think a spin-off could be a useful option for your company. If you're interested, don't hesitate to contact us atinfohn@lexincorp.comIacaceres@lexincorp.com *Legal Notice: The general information contained in this document is provided for informational purposes only and should not be construed as legal advice on any of the topics discussed. You should not act or refrain from acting on the basis of any content contained herein without seeking legal or other professional advice. We disclaim any liability for any actions you take or refrain from taking based on any content in this communication. [1]Elementary Legal Dictionary – Guillermo Cabanellas de Torres – 19th edition – Buenos Aires – Heliasta Publishing House, 2008 – Page[2]Regulations of the Law for Job Creation, Entrepreneurship Promotion, Business Formalization, and Protection of Investor Rights.[3]Structural Modifications of Commercial Companies – Victor Manuel Garrido De Palma – 2013 – Chapter V “Demerger”.[4]Some Thoughts on the Demerger of Companies – Dr. Gastón Certad M. – Costa Rica – 2014.[5]Argentina with its respective Companies Law, Section XI “Merger and Demerger”.[6]The Demerger Project is essentially an executive summary of the transaction, ensuring that it is understandable to the Assembly during the proposal presentation. [/vc_column_text][vc_column_text] Written by: Lexincorp Honduras [/vc_column_text][/vc_column][/vc_row]