Mitigating Risks in Company Split-offs: Addressing Shareholder and Creditor Opposition

When shareholders, partners or senior management of a company begin to assess the benefits and challenges of carrying out a company’s split-off, a variety of questions often arise.

Among them, whether the split-off will the objectives set in terms of greater efficiency in the management and investment of resources, in the optimization of the company’s operations, the adaptation and success of the companies that are born to current markets, etc.

To this end, by considering and evaluating whether the benefits pursued outweigh the challenges, decision-makers will conclude whether or not they are doing the split-off.

One of those challenges is compliance with legal requirements.

As it is a matter of relevance to the future of the company that wishes to split-off, only qualified majorities of shareholders or partners assembled in meetings can take this decision.

In addition, the contributions that the partners or shareholders are obliged to make either at the setting-up of the company, or at a later time, must be fully paid.

The two pre-requisites are already a challenge for the planning of the split-off. Because only the majorities that reach a percentage determined by the law can decide whether or not to approve it. Of course, those members or shareholders who voted against will have the right to separate themselves from the company.

In addition, the shareholders should not be pending coverage of their shareholdings or shares.

However, in addition to the aforementioned and other requirements laid down by law, a central issue that companies seeking to split should consider is the right of opposition granted by law to certain persons.

That is, the right to object to the split.

The resolution approving the split must be registered in the Public Trade Register and published in the electronic system of the Economic Secretariat for publicity. This is done with the aim that the partner(s) who do not agree with the split-off and who represent at least twenty per cent of the share capital, as well as any creditor who has a legal interest, can object to it.

From the date of such publication and registration, the aforementioned members and/or creditors will have a period of 45 calendar days to object to the separation.

What implications does opposition to the split-off have?

The objective of making the split-off agreement public is to give those interested parties the opportunity to challenge the company’s resolution before the courts.

While it is true that a split-off can bring multiple benefits to the company, as well as to its partners or shareholders, it could also have adverse effects for its creditors or for the partners who had not attended the meeting, or who had voted against it.

The corporate assets of a company, among other matters, represent a guarantee and promise of payment to its creditors. As such assets (assets, liabilities and share capital) are divided, either in whole or in part, to be contributed in blocks to another or other newly established companies, the chances of creditors’ successful recovery could be compromised.

In other words, the conditions under which the creditors of the company contracted with it would change as a result of the split-off. To such an extent that it would be another newly created person who would assume the payment obligation to the creditor(s).

Moreover, there is a period of three years from the publication of the split-off agreement for the other or other newly created companies to be jointly liable for the payment obligations of the newly established company bound to it.

Of course, this does not mean that creditors will be completely helpless in the face of a split-off.

Otherwise, the law would not authorize the realization of split-offs, nor would it require companies to register and publish the split-off agreement.

How can the partners of the company and its creditors demonstrate their legitimacy to oppose the split-off?

To demonstrate the quality or status of the partners so that they can object to the separation, it would be sufficient for them to be registered in the corresponding registry books. And in the case of shareholders, they must show their stock share or provisional certificates.

The updated corporate books will reflect the percentage of the share capital of the partners who wish to object.

But in the case of creditors, how could they prove they are indeed creditors? More importantly, how would they verify that they have a legal interest according to the law?

There are two positions to answer the above questions. The first is that any person who demonstrates that he or she has a right to demand the fulfilment of an obligation on the part of the spun-off company proves the legal interest.

This is regardless of the type of debt the company has in favour of the creditor, and the amount of the debt.

The second position is that, in order to prove the creditor’s legal interest, there must be a – firm – judgment condemning the company that splits to comply with a certain obligation in favour of the creditors.

Our federal courts have supported the first position. They have argued that it is not necessary for the law to include:

“a detailed description of what type of creditors have such interest, as these may be of different nature and contained in different arrangements, because the purpose of the rule is only to protect creditors, regardless of the type of legal interest they have and even less the quantification of the credit on which they are made dependent…”[1]

Final Comments

A precise analysis of the various legal challenges that a company seeking to split-off could face is essential. This will not only avoid inconvenience for the company’s partners, but will also make it easier for the goals pursued by the division to be achieved more quickly and efficiently.

One practical suggestion that will help mitigate the risks of potential opposition from both partners and creditors is that, where the relationship permits, there are approaches to explain the process.

If possible, it is recommended to document the prior consent of the creditors to the split-off.

At best, a judicial opposition can delay the effects of the split-off at the desired time.

In the worst case scenario, it can prevent the split-off from taking place without a payment agreement being reached with the creditor first.

I would like to know your opinion acervantes@ceglegal.com

[1] [TA]; 10th Epoch; T.C.C.; Gaceta S.J.F.; Book 59, October 2018; Volume III; Page 2158. Digital Registration 2018107.