What measures should be taken to best prepare for a corporate reorganisation?
A comprehensive and accurate due diligence, especially of legal, tax, accounting and financial aspects, is extremely important when undertaking a corporate reorganisation. The scope of legal due diligence depends on the areas in which the relevant entities conduct their business and, therefore, may vary, but usually includes investigation of corporate, regulatory, real estate and other assets, IP, contracts employment and other areas.
We also recommend reasonable communication with the key stakeholders of the companies before the reorganisation to conduct it smoothly and without conflicts and other impediments from third parties.
Another recommendation is to check agreements with banks, customers and suppliers. They may contain change-of-control clauses which may require a prior notification trigger of early termination of the contract or provide other consequences. All such requirements should be considered in advance as they do not always have carve-outs for intra-group reorganisations.Employment issues
What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?
Generally, corporate reorganisation does not affect the rights or obligations of employees. After a corporate reorganisation of the company, its employees are automatically transferred to the successor or surviving entity. The employees’ consent for such transfer is not required. All employment terms and conditions remain the same unless employees are made redundant due to a reorganisation.
When a company decides to lay off employees or change employment terms in the course of reorganisation, it must comply with the statutory procedures and collective bargaining agreement. In particular, the company must notify its employees at least two months before the effective date of respective changes. The owner of the company being reorganised must consult with the local trade union on the measures to prevent layoffs in the course of the reorganisation.
The company must ensure statutory guarantees, such as severance payments, to all redundant employees. An employee may claim for a severance payment of at least one average monthly salary if he or she is laid off owing to reorganisation or redundancy. The employer is free to pay a higher ‘exit’ compensation.
What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?
The corporate reorganisation does not affect employees’ pensions and other benefits except for the right to a severance payment as described in question 8.Financial assistance
Is financial assistance prohibited or restricted in your jurisdiction?
The Law of Ukraine ‘On Joint Stock Companies’ (article 23) prohibits a joint stock company from providing a loan for acquisition of its shares. The Law ‘On Limited Liability and Additional Liability Companies’ (article 13), in turn, sets restrictions for corresponding types of companies to credit participants for contributions to registered capital of the company in exchange for the participatory interest (share) in it.
Other forms of lawful financial assistance for corporate reorganisations are allowed.Common problems
What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?
Among the most commonly overlooked and frequently asked questions in a corporate reorganisation are the following:
- prior approvals from the state authorities required to undertake corporate reorganisation (see question 6);
- tax consequences of the contemplated reorganisation, including assignment of the tax credit of the terminating company, etc;
- post-reorganisation measures which the legal successor should take;
- the effectiveness of licences, permits and agreements transferred to the legal successor of the reorganised company;
- the effectiveness of the property rights to the assets, including real estate and land plots, transferred to the legal successor, and necessity of re-registration of property rights in the name of the latter;
- subsidiary liability of legal successor for liabilities of the reorganised company (the law provides for such liability);
- compatibility of certain specific forms of legal entities (farms, private enterprises, non-government organisations, etc) for transformation into business companies (LLCs, JSCs, etc);
- procedure and time frame required to complete corporate reorganisation; and
- the corporate governance update as well as rearranging the shareholders’ agreement after the reorganisation, especially in a group of companies.
Accounting and taxAccounting and valuation
How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?
The accounting rules that apply to corporate reorganisation consistently depend on the type of reorganisation. The participants of a particular reorganisation approve a transfer protocol or a distribution balance sheet listing the transferred assets and liabilities and their book value.
The corporate reorganisation of the state or municipal enterprise or a company with a state or municipal share in equity requires a mandatory market valuation of the assets by the certified appraiser.Tax issues
What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?
First, the companies affected by corporate reorganisation (except transformation) are subject to an extraordinary audit by the tax authorities.
Generally, the surviving company or the successors assume all the tax liabilities, profits and losses of the reorganised company. However, its outstanding tax liabilities usually significantly complicate the reorganisation procedure, as in this case, the reorganisation needs the tax authority’s approval.
In terms of corporate income tax (CIT), corporate reorganisation is a neutral transaction under the national accounting regulations (standards). The Tax Code of Ukraine provides for no adjustments of the financial result of companies involved in the reorganisation. Accordingly, corporate reorganisation does not lead to any CIT.
The Tax Code of Ukraine also excludes reorganisation procedures (amalgamation, absorption, transformation, division and spin-off) from taxation by value added tax (VAT). Business sometimes utilises this exception and conveys valuable assets, such as real estate, through spin-off instead of a buy-sell deal which is subject to VAT.