Key issues


What measures should be taken to best prepare for a corporate reorganisation?

In order to properly prepare for a corporate reorganisation, there are two general measures that, in most cases, need to be taken into consideration.

First, due diligence is usually carried out regarding the target company or target business in order to identify related contingencies. Simultaneously, it is also important to perform a tax assessment and tax structuring of the transaction aimed at obtaining the most efficient transaction structure in light of the particulars of the case.

Moreover, in cases where contingencies are identified in the due diligence phase, it is common to implement certain remediation measures prior to completing the corporate reorganisation.

Regarding tax, it is important to conduct a tax due diligence in order to ascertain the tax impacts of the reorganisation and also the benefits that require recognition by the tax authorities.

Employment issues

What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?

The main issues relating to employees and employment contracts to consider in a corporate reorganisation are related to the rules applicable to the transfer of undertaking and employers’ information obligations.

Specifically, the Portuguese Labour Code provides that, in the case of a transfer of undertaking, the employer’s contractual position in the employment agreements with its employees, together with any liabilities arising from penalties imposed under labour administrative offences, are transferred to the acquirer. Similarly, the PCCC contains a rule according to which the employment agreements related to the target company or target business are transferred to the acquirer in the context of merger and demerger transactions. Also, the Portuguese Labour Code sets forth that the transferor remains jointly liable with the acquirer for the labour obligations that have become due up to the date of transfer for a further two years as of that date (after this date has elapsed, the acquirer will be solely responsible for debts that were vested before the date of the transfer).

However, in order to reinforce the protection awarded to the employees of a transferring business, significant changes to the Portuguese Labour Code were approved in March 2018, notably: (i) the express recognition of the transferring employees’ right to object to their transfer; and (ii) the introduction of more burdensome consultation and information obligations for the transferor and transferee.

As per the new legal framework, the employees may object to the transfer of their employment agreements to the transferee and stay with their existing employer whenever such transfer may cause them serious prejudice. Moreover, after the transfer of the employment agreements has taken place, the employees who did not object to their transfer may also maintain that they were seriously prejudiced as a result of the transfer and terminate the employment agreement with the acquirer, demanding severance compensation.

At this moment, the unclear wording of the new provisions and the absence of case law are raising several doubts, such as:

  • Firstly, the law does not provide a definition of what is to be considered ‘serious prejudice’, merely setting forth some abstract examples, such as the acquirer being evidently insolvent or in financial and economic difficulties, or when the employee does not trust the acquirer’s human resources department’s organisational policies.
  • Secondly, the ultimate consequences of an employee’s objection to a transfer are also not duly called into question, given the unclear wording of the new provisions. In fact, if an employee objects to the transfer of their agreements and decides to stay with the transferor, the latter could refuse and force him or her to bring a lawsuit to prove the alleged serious prejudice. If successful, the employee’s right to stay with the transferor would be recognised, but it is unclear what would happen if the employee is unsuccessful (eg, would the employee be deemed to have transferred to the acquirer? Will the unsuccessful invoking of the objection right be qualified as resignation without the right to compensation?). Additionally, the objection right is particularly ill-designed in respect of situations where the transferor ceases to exist, notably in the case of a merger.
  • Thirdly, regarding the possibility of the employee suffering serious prejudice after the transfer occurs, the deadline for invoking this right is controversial - in other words, it is questionable whether there is a statute of limitations or a deadline to invoke this termination right. Some scholars also maintain that the right to terminate the agreement and claim the severance payment from the acquirer of the business would only be possible in cases of the transfer of an entire undertaking and not a transfer of a business. Again, this is also debatable, and given how recent these changes are it is not yet possible to anticipate what the courts will decide.

Moreover, the information and consultation obligations which fall on the transferor and transferee are now much more burdensome and demanding. Thus, in addition to the disclosure to the transferring employees (and their representatives) of: (i) the date and motives for the transfer; and (ii) the legal, economic and social consequences of the projected transfer regarding the employees and envisaged employment measures, the parties are now obliged to inform the employees, the employees’ representative structures and the Labour Authorities about the content of the transfer agreement concluded between the transferor and the acquirer (if there is one). The level of information which is expected to be disclosed is, however, also unclear. Are the parties bound to inform the employees and the Labour Authorities of the value and economics of the deal or only the employment-related matters? Whatever the answer, the truth is that, as per the Portuguese Labour Code, the employer is not obliged to disclose business information which is of a sensitive nature and that could damage or seriously affect the operation of the company.

Finally, in cases where the corporate reorganisation does not entail a transfer of undertaking but results in a modification of the target company’s group relationships, the employer also has to inform its employees of the same within 30 days from completion.

What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?

A distinction must be made between public and private pension schemes, as public schemes are mandatory in Portugal in respect of most employees and trigger several obligations for employers and employees. The most important of these obligations is the payment of social charges at a general rate of 34.75 per cent (23.75 per cent borne by the employer and 11 per cent by the employee, without any caps). The public social security system, funded with the contributions of employers and employees, generally ensures retirement, disability, unemployment, illness, death, and maternity or paternity benefits. Private pension schemes are most commonly optional (except in specific sectors or where collective labour agreements impose the arrangement of private pension schemes for employees) and often grant additional protection in terms of retirement and disability pensions paid for by the public system. Nonetheless, employers are not usually free to terminate these pension schemes.

Within the scope of a share deal, the buyer will inherit the pension liabilities of the seller and shall be bound by the same rules that were applicable to the latter. In an asset deal, along with the transfer of the employment agreements, the buyer will also be jointly and severally liable with the seller for the social security liabilities that exist at the date of the transfer, and any agreement between the parties setting this provision aside is null and void.

As for private pension schemes, even though the acquirer is not legally obliged to maintain these benefits, in practical terms these mechanisms are respected or replaced by benefits of similar nature and value.

Finally, fringe benefits may be deemed a part of the employees’ remuneration, in which case they may only be withdrawn by the employer provided that they are replaced with a benefit of similar nature and value. Ultimately, this depends on how the fringe benefits were granted, namely if these conditions were included in the individual employment agreements and under which conditions.

Financial assistance

Is financial assistance prohibited or restricted in your jurisdiction?

As a general rule foreseen in the PCCC, a company may not provide funds or security in order for a third party to subscribe or acquire shares in its own share capital or in the share capital of a controlling company.

Exceptions to this rule are as follows:

  • banks or other financial institutions may provide funds or security for the acquisition of their own shares if such operations are done within their ordinary course of business; and
  • a company may provide assistance so that its employees or those of an entity in the same group are able to acquire shares in its own share capital or in the share capital of a controlling company.

In both cases, the equity of the company may not fall below the sum of its share capital and non-distributable reserves as a consequence of these operations. Any financial assistance transaction in contravention of the general rule provided in the PCCC is deemed void, and the directors who approved it may be subject to dismissal with cause by the company, civil and criminal proceedings and the payment of a fine.

Common problems

What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?

Among the most commonly asked questions in corporate reorganisations are questions concerning the cross-liability regime in demergers, and the regime of shareholders’ contributions in the incorporation of companies and share capital increases.

According to the cross-liability regime set forth in the PCCC for demergers: (i) the demerged company remains jointly liable for the debts attributed in the context of the demerger to the acquiring company or new company resulting from the demerger; and (ii) the companies receiving assets in the context of the demerger are jointly liable, up to the net amount of such assets, for the debts of the demerged company existing prior to the definitive registration of the demerger, the PCCC expressly allowing the parties to, in this case, establish that this liability is separate.

This regime is one of the most debated matters with regard to demergers, and of particular importance is its scope and the possibility to establish a separate liability (as opposed to joint liability) in the situation indicated in (i) above.

The regime applicable to shareholders’ contributions in the incorporation of companies and share capital increases is also a frequently asked question. In particular, it is worth mentioning that contributions in kind (for instance, with tangible or intangible assets, or with credits) need to be evaluated by an independent statutory auditor (who is prevented from performing any functions in the company or in related companies within a two-year period) prior to the entering into of the articles of incorporation or resolution approving the share capital increase, as the case may be.

Accounting and tax

Accounting and valuation

How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?

As a general rule, the Portuguese GAAP apply the acquisition method to business combinations (based on IFRS 3). As such, the assets and liabilities are valued at fair value and any difference between their net fair value in the context of a corporate reorganisation and the respective consideration is recognised as goodwill or as a gain in the profit and loss statement, as applicable. There are no specific standards in respect of common control transactions and, as such, the accounting treatment in these cases shall be confirmed case by case.

Tax issues

What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?

As a general rule, any transfer of assets in the context of business reorganisation may result in gains or losses that are subject to CIT. However, a special tax neutrality framework (based on the Merger Directive) applies to most forms of mergers, demergers, exchanges of assets and exchanges of shares executed between Portuguese resident entities or entities that are resident in the European Union. Under these rules, no gains or losses are recognised as a result of the transfer and are subject to roll-over by the acquirer, provided certain conditions are met (eg, the acquirer of the assets continues to value, for tax purposes, the assets and liabilities that are transferred for their historical tax base).

Whenever the corporate restructuring entails the transfer to a third party of the majority of the share capital or voting rights of a Portuguese company, the carry forward of tax losses and non-deducted net financial expenses is subject to authorisation by the tax authorities.

Transfers of businesses in the context of a corporate reorganisation may also be subject to VAT. However, a no-supply rule applies to transfers of businesses as a going concern between VAT-taxable entities, which applies to most corporate reorganisations.

RETT and stamp tax may also be triggered by a corporate reorganisation whenever real estate or a lessee position in a lease agreement is transferred. In this respect, RETT and stamp tax exemptions are also available provided that the corporate reorganisation is carried out with valid underlying economic reasons.