Merging makes sense for companies with losses
||Ludvík Juřička, Ambruz & Dark law firm
Dagmar Faltová, PricewaterhouseCoopers
|| Prague Business Journal, 22/04/2002
In the right circumstances, a merger can be a suitable solution
for a company with losses.
If a company suffers negative equity, its statutory representatives
have certain obligations. A statutory representative acts on behalf
of a company and is liable not only for its operation, but also
for any damage caused to the company by a breach of his or her duties.
The statutory representative is also liable to the General Meeting
of the company and is obliged to follow its instructions.
When the statutory representative determines that settling losses
would use more than half of the company's registered capital, he
or she must convene a General Meeting that will decide whether to
wind up the company or adopt another measure—such as merging with
a company that has positive equity.
Generally, a merger of two companies means that one is wound up
without liquidation and deleted from the Commercial Register, while
the other company becomes the legal successor. Both act as independent
legal entities until the merging company (the one being acquired)
is deleted from the Commercial Register. The business assets of
the merging company, including its rights and employment obligations,
pass to the successor on the day the merger is entered in the Commercial
The common perception is that a merger is a very complicated process.
However, when both companies have the same shareholder, the merger
process can be quite simple. For example, two companies (A and B)
owned by one shareholder are to merge. Company A has negative equity
and settling its losses would use more than half of its registered
Two scenarios are possible:
||Company B has sufficient positive equity for the legal successor
to have positive equity; or
||Company B has insufficient positive equity for the legal successor
to have positive equity.
The first scenario is less time-consuming and easier from an organizational
point of view than the second option because no business shares
for shareholders of the legal successor arise in the merging company.
Company A is wound up without liquidation and deleted from the Commercial
Register, and company B becomes the legal successor. The merging
company is not obliged to have its equity evaluated by an official
report if both companies agree. It would not be necessary to liquidate
the merging company because this company would dissolve within the
The second solution is more problematic and the merger would have
more legal complications. The question arises as to whether the
merger can be listed in the Commercial Register if the legal successor
has negative equity. The court could decide that the merger is not
an adequate solution if negative equity still exists after the merger.
Solutions for this scenario could include:
||Increase of own capital by contributing money into other capital
funds (simple procedure)
||Increase of the registered capital (complex procedure)
As of Jan. 1, 2001, the Czech Commercial Code states that a shareholder
may increase the own capital by contributing money. Such a contribution
must be approved by the General Meeting of the company and a notary
record is required for such a decision.
The procedure of increasing the registered capital is quite lengthy.
The increase is effective the day it is entered into the Commercial
To decide which company should become the legal successor, it is
crucial to consider the tax implications of the merger. If company
A has accumulated tax losses in addition to negative equity, it
is more practical tax-wise to keep company A as the legal successor.
If company A is to be dissolved within the merger, the tax losses
declared by the company cannot be transferred to the legal successor.
The same rule is applicable for the transfer of a 10 percent allowance
from the input price of newly purchased property that the dissolved
company didn't fully use in previous taxable periods. This type
of claim expires in the event of a merger. Transformation by a merger
is not considered a breach of the conditions stipulated by the Income
Taxes Act related to investment allowance. Therefore, neither the
dissolved company nor the successor is obliged to increase the tax
base by the previously applied investment allowance.
So the merger could be considered a viable option if the legal
successor will end up with positive equity. If there is a risk that
the legal successor will have negative equity, the shareholder should
decide to increase own capital or registered capital of one of the
merging companies to avoid potential problems with registration
of the merger.
Ambruz & Dark, advokáti, v.o.s.
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