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Reorganization

LAWCONSULT-GROUP LEGAL AID COMPANY POSSESSES MUCH EXPERIENCE IN SUPPORTING REORGANIZATION PROCEDURES FOR LEGAL ENTITIES.
LAWCONSULT-GROUP legal aid company will help you develop the optimal way of reorganization and will undertake to solve all the issues related to the implementation of that procedure, including:
  • The preparation of a package of documents required,
  • The preparation for holding the participants (stockholders) meeting,
  • The execution of all the necessary registration procedures,
  • The involvement of auditors for carrying out the inventory taking and drawing up separation balance sheets and deeds of assignment.

LEGAL SUCCESSION AT THE REORGANIZATION

When reorganization takes place, the universal succession emerges. The lapse of rights and obligations of a legal entity to its legal successor(s) must be legalized in the form of separation balance sheet (in case of reorganization in the form of segregation and split) and deed of assignment (in case of reorganization in the form of merger, affiliation and reformation). The main function of the above documents is to define the rights and obligations passing to each of successors, and their volume.

The separation balance sheet and deed of assignment must contain provisions on legal succession concerning all the obligations of the reorganized legal entity towards its creditors and debtors, including the obligations contested by the parties (Par.1, Art. 59 of the RF Civil Code). In joint stock companies, the separation balance sheet and the deed of assignment also should provide information on the order of determining the succession in connection with alterations in the type, structure, property value of a company being reorganized, as well as in connection with the emergence, alteration and termination of rights and obligations of the company being reorganized, which may happen after the date of signature of the deed of assignment and the separation balance sheet (Par.6, Art.15 of the Federal Law “On Joint-Stock Companies”).
The legal entity is considered to be fully reorganized, except the case of reorganization in the form of affiliation, from the moment of state registration of the newly originated legal entities. When reorganizing a legal entity in the form of affiliating another legal entity to it, the former is considered to be reorganized from the moment of entry into the United State Register for Legal Entities of a record of discontinuance of operation of the affiliated legal entity (Par.4 of Art.57 of the RF Civil Code).  

REORGANIZATION AND AIMS

In the Civil Code, there is no definition for the term of reorganization, however, the reorganization in its essence is a specific way of terminating the existing legal entities and forming new ones, based on the universal succession (i.e. the transfer not of certain rights and obligations, but of the whole of them; besides, the succeeding legal entity is not entitled to refuse the assumption of liabilities of the company being reorganized).
The reorganization may be realized for the following goals:
  • Division of business;
  • Restructuring of assets;
  • Integration of business;
  • Withdrawal of assets;
  • Alienation of assets, when direct transactions are forbidden;
  • Tax burden optimization.   

REORGANIZATION AND TAXES

The liability to tax of the reorganized legal entity is effected by its successor(s), in accordance with Par.1, Art.50 of the RF Tax Code. However, as per Par.8 of the same article, when segregating one or several legal entities from the original legal entity, the succession of tax liabilities of the reorganized legal entity does not happen. And still, if, as the result of segregation of one or several legal entities from the original legal entity, the taxpayer does not have a chance to fully fulfill the liability to tax, or the reorganization was meant for the non-fulfillment of liability to tax, then the court may decide to oblige the segregated legal entities to fulfill jointly the liability to tax of the reorganized legal entity.
In accordance with Subpar.1, Par.2, Art.146 of the RF Tax Code, the operations stated in the Par.3, Art.39 of the RF Tax Code, including the transfer of fixed assets, intangible assets and/or other property of a company to its successor(s) within the framework of reorganization of that company, are not subject to the imposition of VAT. The same refers to the transfer of property rights of a company to its successor(s) (Subpar.7, Par.2, Art.146 of the RF Tax Code).
Therefore, when a company is reorganized, there is no subject to the imposition of VAT emerging.
Certain particularities of taxation at the reorganization of companies (in case of receiving advance payments or other payments for the future deliveries of goods) are stipulated by Art.162.1 of the RF Tax Code, namely:
In accordance with Par.3, Art.251 of the RF Tax Code, in case of reorganization of companies, when calculating the basic income tax, the value of assets, property and non-property rights evaluable monetarily, and/or liabilities received (transferred) in the succession order upon the reorganization of legal persons, which were acquired (created) by the companies being reorganized before the date of completing the reorganization, is not included into the income structure of the newly established, undergoing reorganization or reorganized companies.
Therefore, the income tax for the value of assets, property and non-property rights evaluable monetarily, and/or liabilities transferred by the company undergoing reorganization to a newly created company is not paid.  

TYPES OF REORGANIZATION

The reorganization of a legal entity can be realized in the following forms (Art.57 of the RF Civil Code):
MERGER (several legal entities constitute a new company succeeding all the rights and obligations of each one of the reorganized legal entities, which terminate their activities);
AFFILIATION (the affiliated legal entity shuts down its activities, and all its rights and obligations pass to a legal entity, that it has affiliated itself with);
SPLIT (the reorganized legal entity shuts down its activities through being divided into several independent legal entities, with all its rights and obligations being divided among them);
SEGREGATION (the reorganized legal entity does not terminate its existence, but transfers a part of the rights and obligations belonging to it to segregated companies);
REFORMATION (the legal entity’s organizational form is altered, resulting in the closure of the reorganized company, which transfers all its rights and obligations to the newly created company).
The chosen form of reorganization defines its procedural order and the documents package to be processed.  

MERGER

Merger is the origination of a new legal entity through the transferring to it of all the rights and obligations of two and more legal persons, with the termination of the latter ones.
(General provisions and main stages of the reorganization are described by the example for the most common organizational legal forms of legal entities – LLC and JSC)
The companies involved in merger sign a merger agreement, determining the order and conditions of reorganization, and the order of conversion of shares of each company into shares of the new company particularly for joint-stock companies, as well as specifying the creation of management bodies and an auditing body for the company).
The decision on reorganization is taken by general meeting of participants (stockholders meeting presented by the board of directors for joint-stock companies) of each company involved in the merger. The same meeting approves the merger agreement, deed of assignment, charter of the new company.
In LLCs the executive bodies for the newly created company are elected at the general meeting of all participants of the companies involved in the merger.
When companies merge, the rights and obligations of each of them pass to the company created as the result of merger, in accordance with deeds of assignment.
Main stages of reorganization in the form of merger:
- the companies involved in the merger draw up a merger agreement;
- for joint-stock companies the market value of shares is to be appraised, since, in accordance with Par.1 Art.75 of the Federal Law “On Joint-Stock Companies”, the stockholders with voting shares who at the general meeting voted against the decision on reorganizing the company or who did not take part in the voting on the issue, are entitled to demand repurchasing their stock by the company. The company buys shares at the price determined by the Board of Directors (or the similar body of the same function), but the price cannot be less than the market value defined by an independent appraiser (the repurchasing price is to be indicated in the company note about holding the general meeting);
- each one of the companies involved in the merger makes a decision on reorganization;
- the general meeting is held for participants of the companies involved in the merger;
- the tax body where the company is registered is to be notified of the planned reorganization within 3 days from the moment of making the reorganization decision (Art.23 of the RF Tax Code);
- all creditors are to be notified of reorganization; a reorganization report is to be published in a newspaper responsible for the publication of state registration data on legal entities;
- a new legal entity created as the result of reorganization is to undergo the state registration, a record of discontinuance of operation of the reorganized companies is to be entered into the United State Register for Legal Entities;
- in case of creating a joint-stock company as the result of reorganization, the issue of securities is to be registered in the Federal Financial Markets Service;
- for joint-stock companies it is required to notify the Federal Financial Markets Service of the reorganization and cancellation of shares of the reorganized companies.  

AFFILIATION

Affiliation is a termination of one or several legal persons with the transfer of all their rights and obligations to another legal entity.

(General provisions and main stages of the reorganization are described by the example of the most common organizational legal forms for the legal entities – LLC and JSC)

The companies involved in the reorganization in the form of affiliation sign an affiliation agreement, which determines the order and conditions of reorganization, and the order of conversion of shares of the affiliated company into shares of the affiliating company particularly for joint-stock companies, and specifies as well the authorization of foundation documents of the newly created company, creation of its management bodies and auditing body.
The decision on reorganization is taken by the general meeting of participants (the stockholders meeting presented by the board of directors for joint-stock companies) of each company involved in the reorganization. Besides, general meetings of each company approve an affiliation agreement, and the general meeting of the affiliated company decides on the approval of a deed of assignment.
In LLCs, the joint general meeting of participants of companies involved in affiliation takes decision on the alteration of foundation documents of the affiliating company, and decides as well on other matters, including the issues of electing the affiliating company management bodies.
When one company affiliates itself to another, the latter receives all the rights and obligations of the affiliated company in accordance with the deed of assignment.
Main stages of reorganization in the form of affiliation:
- the companies involved in the reorganization, draw up an affiliation agreement;
- the market value of shares is to be appraised for joint-stock companies, since, in accordance with Par.1 Art.75 of the Federal Law “On Joint-Stock Companies”, the stockholders with voting shares who at the general meeting voted against the decision on reorganizing the company or who did not take part in the voting on the issue, are entitled to demand repurchasing their stock by the company. The company buys shares at the price determined by the Board of Directors (or the similar body of the same function), but the price cannot be less than the market value defined by an independent appraiser (the repurchasing price is to be indicated in the company note about holding the general meeting);
- each one of the companies involved in the affiliation makes a decision on reorganization;
- the general meeting is held for participants of the companies involved in the affiliation;
- the tax body where the company is registered is to be notified of the planned reorganization within 3 days from the moment of taking the reorganization decision (Art.23 of the RF Tax Code);
- all creditors are to be notified of reorganization; a reorganization report is to be published in a newspaper responsible for the publication of state registration data on legal entities;
- the state registration is to be conducted for reorganization-related alterations and addendums to the foundation documents of the affiliating company; a record of discontinuance of operation of the affiliated company is to be entered into the United State Register for Legal Entities. 

SPLIT

Split is a termination of a legal person with the transfer of all its rights and obligations to newly created legal entities.
(General provisions and main stages of the reorganization are described by the example of the most common organizational legal forms for the legal entities – LLC and JSC)

The general meeting of company participants (the stockholders meeting presented by the board of directors for joint-stock companies) decides on the reorganization in the form of split, on the order and conditions of split, on the creation of new companies and on the approval of a new separation balance sheet (additionally for joint-stock companies on the order of conversion of shares of the reorganized company into shares of the created companies, on the creation of management bodies and auditing body for the company and on the authorization of its foundation documents).
In LLCs the general meeting of each created legal person decides on the approval of new foundation documents for the company and on the formation of its bodies.
When splitting a legal entity, all of its rights and obligations pass to companies created as the result of split, in accordance with the separation balance sheet.

Main stages of reorganization in the form of split: - the market value of shares is to be appraised for joint-stock companies, since, in accordance with Par.1 Art.75 of the Federal Law “On Joint-Stock Companies”, the stockholders with voting shares who at the general meeting voted against the decision on reorganizing the company or who did not take part in the voting on the issue, are entitled to demand repurchasing their stock by the company. The company buys shares at the price determined by the Board of Directors (or the similar body of the same function), but the price cannot be less than the market value defined by an independent appraiser (the repurchasing price is to be indicated in the company note about holding the general meeting);
- The general meeting of participants (stockholders) of the legal entity undergoing the reorganization takes the decision on the reorganization;
- the tax body where the company is registered is to be notified of the planned reorganization within 3 days from the moment of taking the reorganization decision (Art.23 of the RF Tax Code);
- all creditors are to be notified of reorganization; a reorganization report is to be published in a newspaper responsible for the publication of state registration data on legal entities;
- in limited liability companies the general meeting of participants of each created legal entity decides on the approval of a charter, constituent agreement and on the election of company’s bodies;
- the state registration is to be conducted for the new legal entities; a record of discontinuance of operation of the reorganized company is to be entered into the United State Register for Legal Entities;
- for joint-stock companies it is required to register in the Federal Financial Markets Service the issue of securities of each created company; notify the Federal Financial Markets Service of the reorganization and cancellation of shares of the reorganized company. 
 

SEGREGATION

Segregation is the creation of one or several legal persons with the transfer to it (them) of the part of rights and obligations of the legal entity under reorganization without closing activities of the latter.
(General provisions and main stages of the reorganization are described by the example of the most common organizational legal forms for the legal entities – LLC and JSC)

The general meeting of participants (the stockholders meeting presented by the board of directors for joint-stock companies) of the company under reorganization decides on the reorganization, on the order and conditions of segregation, on the creation of a new company and on the approval of a separation balance sheet, on the reorganization-related alteration of foundation documents of the company being reorganized, additionally for joint-stock companies on the conversion of shares of the company under reorganization into shares of the newly created company (distribution of shares of the created company among the stockholders of the company undergoing reorganization, purchase of shares of the new company by the company undergoing reorganization) and on the order of such a conversion (distribution, purchase), as well as on the creation of management bodies and an auditing body for the company and the approval of its foundation documents.
In LLCs, the general meeting of each created legal person makes a decision on the approval of foundation documents of the company and the formation of its management bodies.
When segregating one ore several legal entities from a legal entity, each one of them receives a part of rights and obligations of the legal person reorganized by segregation in accordance with the separation balance sheet.
Main stages of reorganization in the form of segregation: - the market value of shares is to be appraised for joint-stock companies, since, in accordance with Par.1 Art.75 of the Federal Law “On Joint-Stock Companies”, the stockholders with voting shares who at the general meeting voted against the decision on reorganizing the company or who did not take part in the voting on the issue, are entitled to demand repurchasing their stock by the company. The company buys shares at the price determined by the Board of Directors (or the similar body of the same function), but the price cannot be less than the market value defined by an independent appraiser (the repurchasing price is to be indicated in the company note about holding the general meeting);
- the general meeting of participants (stockholders) of the legal entity under reorganization makes a decision on the reorganization;
- the segregated legal entity holds a general meeting of its participants (stockholders);
- the tax body where the company is registered is to be notified of the planned reorganization within 3 days from the moment of taking the reorganization decision (Art.23 of the RF Tax Code);
- all creditors are to be notified of reorganization; a reorganization report is to be published in a newspaper responsible for the publication of state registration data on legal entities;
- the state registration is to be conducted for the new legal entities and for the reorganization-related alterations of foundation documents of the reorganized company;
- for joint-stock companies it is required to register the issue of securities in the Federal Financial Markets Service.  

REFORMATION

Reformation is a change of organizational legal form, when the reorganized legal entity ceases to exist, and all its rights and obligations pass to a newly created company in accordance with the deed of assignment.
(General provisions and main stages of the reorganization are described by the example of the most common organizational legal forms for the legal entities – LLC and JSC)

The general meeting of participants (the stockholders meeting presented by the board of directors for joint-stock companies) decides on the reorganization, on the order and conditions of reformation, on the order of exchanging parts (stock) of the legal entity under reorganization with stock (parts, shares) of the created legal entity, on the approval of the deed of assignment (additionally for joint-stock companies the decision on reorganization specifies the approval of foundation documents of the originating company, on the creation of its management bodies and auditing body).
When reorganizing an LLC, the general meeting of participants of the created company makes a decision on the approval of foundation documents, elects management bodies.
When undergoing a reformation, the newly originated legal person succeeds all the rights and obligations of the reorganized company in accordance with the deed of assignment.
The legislation has certain restrictions for conducting reorganization in the form of reformation (for example, commercial companies can not be transformed into non-commercial ones, limited liability companies can not be rearranged into partnership societies).
Main stages of reorganization in the form of reformation: - the market value of shares is to be appraised for joint-stock companies, since, in accordance with Par.1 Art.75 of the Federal Law “On Joint-Stock Companies”, the stockholders with voting shares who at the general meeting voted against the decision on reorganizing the company or who did not take part in the voting on the issue, are entitled to demand repurchasing their stock by the company. The company buys shares at the price determined by the Board of Directors (or the similar body of the same function), but the price cannot be less than the market value defined by an independent appraiser (the repurchasing price is to be indicated in the company note about holding the general meeting);
- the general meeting of participants (stockholders) of the legal entity undergoing reorganization makes a decision on reorganization;
- the tax body where the company is registered is to be notified of the planned reorganization within 3 days from the moment of taking the reorganization decision (Art.23 of the RF Tax Code);
- all creditors are to be notified of reorganization; a reorganization report is to be published in a newspaper responsible for the publication of state registration data on legal entities;
- In a LLC, the general meeting of participants of the legal entity being established, decides on the election of bodies of the company, approves foundation documents);
- the state registration is to be conducted for the new legal entity and a record of discontinuance of operation of the reorganized company is to be entered into the United State Register for Legal Entities;
- if the reorganization is aimed at creating a joint-stock company, the issue of shares is to be registered in the Federal Financial Markets Service.