Company Demerger: Definition, Forms and Main Procedural Stages
Articles 54 et seq. of Law 4601/2019
In previous articles in this series, we examined mergers as one of the principal forms of corporate transformation. In this article, we turn our attention to demergers, through which corporate assets or independent business branches are transferred to beneficiary companies. The choice of form determines whether the company being demerged continues to exist and who receives the shares or other corporate participations in the beneficiary companies.
Definition and Main Characteristics
A demerger may take the form of a full demerger, a partial demerger or a spin-off of a business branch (Article 54). Their common characteristic is universal succession by the beneficiary companies in respect of the assets and liabilities allocated to them. They differ in the extent of the transfer, whether the company being demerged continues to exist and who receives the corporate participations.
In a partial demerger and a spin-off of a business branch, one or more business branches are transferred. A business branch consists of a set of assets and liabilities constituting an organisationally independent business operation capable of functioning on its own (Article 54(3)). The required independence must arise from the actual organisation and operation of the branch, not merely from its description in the draft terms.
Forms of Demerger
The appropriate form depends on the purpose of the transformation: whether the company being demerged is to cease to exist permanently or continue its activities. In the latter case, the decisive factor is who will acquire the participations in the beneficiary companies.
a) Full Demerger
In a full demerger, the company being demerged is dissolved without liquidation and transfers all its assets and liabilities to at least two beneficiary companies. Its shareholders or partners receive corporate participations in the beneficiary companies and, potentially, a cash payment of up to 10% of their nominal value. Where there is no nominal value, the limit is calculated on the basis of the accounting value of the participations (Article 55).
b) Partial Demerger
In a partial demerger, the company being demerged continues to exist and transfers one or more independent business branches. The corporate participations in the beneficiary companies are allotted to the shareholders or partners of the company being demerged, who also retain their participations in that company (Article 56).
c) Spin-Off of a Business Branch
In a spin-off of a business branch, the company being demerged also continues to exist and transfers one or more independent business branches. The essential difference from a partial demerger concerns the recipient of the corporate participations: they are received by the company being demerged itself, rather than by its shareholders or partners (Article 57).
Each of the above forms of demerger may be carried out by acquisition, through the formation of one or more new companies, or through a combination of the two methods. In the first case, the transfer is made to existing companies; in the second, to newly formed companies; and in the third, to both. Where new beneficiary companies are formed, special provisions apply to the draft terms and the demerger instrument (Articles 74–75).
The Demerger Procedure: Main Stages
Despite their differences, the three forms of demerger follow common basic stages. The provisions governing demergers refer, in several respects, to the rules on mergers, adapted to the nature of the transaction (Article 54(2)). The procedure may be summarised as follows:
a) Preparation of the Draft Terms of Demerger
In a demerger by acquisition, the administrative bodies prepare draft terms of a demerger agreement (Article 59). Where new beneficiary companies are formed, the draft terms of demerger are prepared by the administrative body of the company being demerged (Article 74). The draft terms specify the consideration and the precise allocation of corporate participations, assets and liabilities. If the allocation cannot be determined even through interpretation of the draft terms, unallocated assets are distributed in proportion to the net assets contributed. As regards the corresponding liabilities, the beneficiary companies are jointly and severally liable, each up to the net value of the assets it acquired (Article 59(3)).
b) Publication and Report of the Administrative Body
The draft terms are published in the General Commercial Registry (G.E.MI.) at least one month before the decision (Article 60). The administrative bodies explain the legal and economic grounds for the terms of the demerger in a relevant report (Article 61). Omission of the report generally requires the written agreement of all shareholders or partners and holders of securities carrying voting rights. The relevant document must bear the legally required certification (Article 61(5)).
c) Examination by Experts and Information for Shareholders or Partners
One or more independent experts examine the draft terms and submit a written report, unless a statutory exemption applies (Article 62). Shareholders or partners are granted access to the draft terms, financial statements and required reports (Article 63). In full and partial demergers involving the formation of new companies, proportional allocation of participations permits, among other things, omission of the above reports (Article 74(5)).
d) Protection of Creditors and Employees
Creditors whose claims arose before the demerger and have not yet become due may, subject to conditions, request safeguards within 30 days of completion of the publication formalities for the draft terms (Article 65). They must demonstrate that the demerger makes such safeguards necessary and that they have not received adequate protection. If a beneficiary company fails to satisfy a claim it has assumed, the other beneficiary companies and, where applicable, the company being demerged may be jointly and severally liable. This liability is subject to statutory limits and a five-year limitation period (Article 65(4)). Employees are protected under employment legislation, particularly in relation to rights arising from employment relationships (Article 64).
e) Approval of the Demerger
The demerger is approved by the General Meeting or the partners of each participating company in accordance with the law and its articles of association (Article 66). The decision covers the draft terms and the necessary amendments to the articles of association. In the case of a non-proportional allocation, dissenting minority shareholders or partners may demand the purchase of their participations in the company being demerged itself (Article 66(3)). In a full or partial demerger, an exchange ratio that is not fair may give rise to a claim for compensation, subject to a twelve-month limitation period from completion. It cannot, however, lead to annulment of the demerger (Article 73).
f) Demerger Agreement, Legality Review and Publication
Following approval, a demerger by acquisition is recorded in an agreement, while a demerger involving the formation of new beneficiary companies is recorded in an instrument executed by the company being demerged (Articles 67 and 74). The prescribed legality review and registrations in G.E.MI. follow (Articles 68–69). Deficiencies in the documents or required formalities may delay completion.
g) Completion and Effects of the Demerger
The demerger takes effect upon registration of the agreement or corresponding instrument in G.E.MI. in respect of the beneficiary companies (Article 70). Upon registration, universal succession takes place automatically in respect of the allocated assets and liabilities, subject to any special transfer formalities. In a full demerger, the company being demerged ceases to exist, whereas in a partial demerger and a spin-off of a business branch, it continues to exist. In full and partial demergers, liability of directors and experts is also provided for in cases of culpable breach of their duties (Article 71). Annulment after completion is permitted only for specific defects in the approval decisions, upon an application filed within three months of registration. If the defect is remedied in due time, annulment is not permitted (Article 72).
In Summary: Practical Significance and Value
A demerger can be used to separate business activities, reorganise a corporate group and prepare for investments. The appropriate form determines whether the company being demerged continues to exist and who acquires the participations in the beneficiary companies. A prerequisite for secure implementation is the genuine independence of the business branches being transferred and the complete allocation of assets and liabilities. Ambiguities may trigger statutory allocation rules and joint and several liability. The review of contracts, licences and special formalities, together with the protection of creditors, minority shareholders or partners and employees, is required before completion. Timely preparation reduces delays, claims and subsequent disputes. In our next article, we examine the full demerger.
Managing Partner
Koumentakis and Associates Law Firm
Note: This article forms part of a broader series of articles by our Law Firm on corporate transformations. In this series, we seek to analyse, article by article and always from a business perspective, the provisions of the principal law governing this field (Law 4601/2019).