- BASIC INFO
The year 2020 will be remembered as a corona year, where in addition to the health and psychological consequences of the Corona virus – (COVID19), there have been immense changes globally in the field of business as well.
Some investors have decided not to change their minds about the corona crisis in their intentions to maintain and protect their business model, by taking steps to transfer their capital and overcome this situation which is more than clear that it will continue during the current 2022, in order to preserve and grow their businesses.
In 2020 and 2021, our office was active in conducting capital transactions, ranging from transfer of share/(s), transformation of companies into another legal form, as well as implementation of merger and acquisition procedures between several legal entities, for timely transfer of capital, in accordance with the new needs of the market and of course more efficient functioning in offering their services.
As a special example that we want to point out as a case study, was the implementation of the procedure for division of a company, by takeover of two other companies, ie implementation of a procedure for status change – division by separation with takeover, where the company which was taken over ceases to exist without liquidation procedure being carried out.
What we want to emphasize is in fact the legal misunderstanding we faced during the implementation of this procedure in front of the Central Registry of the Republic of North Macedonia, which as a competent state body is authorized to conduct these kind of procedures, and to our great surprise it happened to be in a negative context.
First in accordance with already defined business needs, shareholders of the three companies (company subject to division by separation with takeover and two acquiring companies) participants in this capital transaction requested procedure for takeover of the company to be in a way that the two acquiring companies will take over the entire property, rights and liabilities of the company subject to division by separation with takeover in the ratio 50% -50%, without increasing the core capital in the acquiring companies.
This request was based in manner that the two shareholders were already 50% -50% owners of the company being taken over, and were sole 100% shareholders each in the two separate acquiring companies.
In terms of the Company Law, we undertook all legal actions from the very beginning until the completion of the entire procedure, based on the given authorizations from the three companies that participated in this procedure.
- Legal misunderstanding
The legal acts and actions from our side in the procedure for change of status – division by separation with takeover were undertaken in a timely manner, respecting all deadlines stipulated in the Company Law for such procedures, as well the fact that all other legal procedures were taken for final realization of this capital transaction and its approval by the Central Registry of R. North Macedonia (hereinafter: CRM), in terms of Articles 520-537 of the Company Law.
The legal misunderstanding arose when we first received a notification from the CRM that our agreement on division of the company – division by separation with takeover, is not in accordance with the provisions of the Company Law, so we must emphasize that the same agreement was previously noted/approved in preliminary procedure by the CRM, and in accordance with the legal obligation provided by the Company Law.
We were informed by the CRM, and then rejected with a decision, that this procedure can not be conducted because the two acquiring companies which are taking over the company, must increase theirs core capital, based on the fact that they are taking over the core capital of the company subject to division by separation with takeover in a ratio of 50% -50%, so theirs core capital must increase each by 50% of the acquired core capital of the company subject to division by separation with takeover.
In our agreement for division of a company – division by separation with takeover in Article 5 it was legally stated on how the core capital of the company subject to division by separation with takeover will be transferred to the other two acquiring companies.
According article 5 from the agreement for division of a company
The core capital of the company subject to division by separation with takeover is divided into shares. The ratio of exchange in the shares of the two acquiring companies is equal to the percentage participation of the shareholders in the core capital in the company that is divided, ie 50% of the core capital of the company subject to division by separation with takeover will belong to Company 1 (acquiring company), and the remaining 50% of the core capital will belong to the Company 2 (acquiring company).
The acquiring companies will not increase the core capital, ie no changes will be made to the statements of incorporation of the companies.
This legal position of ours that the acquiring companies are not obliged, ie it is not obligatory to increase their core capital when making such status changes is in full correlation with Article 534 of the Company Law, which clearly stipulates that the law itself leaves it up to the companies to decide for themselves whether to increase the core capital in such proceedings or not.
According article 534 from Company Law
(1) If the acquiring company increases its charter/core capital for the purposes of the accession, or division by separation with takeover or spin-off with takeover, the following provisions of this Law pertaining to the increase of the charter/core capital shall not be applicable to:
1) The prohibition on increasing the core/charter capital until the subscribed contributions are paid in full;
2) The requirement to state in the application form for registration of the resolution to increase the core/charter capital in the commercial register which contributions were not fully paid;
3) The requirements for subscribing new contributions, or shares; and
4) The pre-emptive right of purchase of parts, or shares.
(2) An audit shall be carried out in the event of an increase of the core/charter capital by non-monetary contributions, where the court determines that the value of the non-monetary contributions does not correspond to the nominal value of the issued parts, or shares as well as in the event of an increase of the core/charter capital in accordance with the provisions of this Law pertaining to authorized capital.
Company Law does not provide an imperative requirement of companies participating in takeover and division procedures to be obliged to increase their core capital, especially since the legal entities in our procedure, and in accordance with the law and the concluded agreement for division, defined that they will take over 50% of the total property, rights and obligations of the company subject to division by separation with takeover.
From our side it was legally explained that the core capital is part of the company asset, i.e. that the core capital of the company is an item in the liabilities and is part of the entire asset of the company subject to division by separation with takeover, so the two acquiring companies don’t need or have any legal obligation to transfer as an increased share in their core capital.
The Company law only provides a legal imperative that companies should not reduce the share capital below the legally prescribed minimum, which is completely different.
We also further explained that the reference of CRM to Article 533 of the Company Law to justify its position that companies must increase the share capital, in fact is a legal basis where participants in such proceedings are prohibited in certain situations where they must not increase the basic capital, for which we will repeat that this was not the case in our situation.
To support our standing point, we submitted legal opinions to the CRM by two eminent professors, namely prof.dr. Dimitar Gelev from the Faculty of Law – Justinian I at the University of St. Cyril and Methodius and prof.dr. Marko Andonov, Dean of the Faculty of Law at the University American College, who fully confirmed our correctly taken legal stance that in case of status change of this nature, increasing the share capital is not obligatory at all and that the action of CRM in this case is self-governance without legal basis.
Despite all efforts, CRM made 3 (three) decisions to reject our applications for conducting a procedure for status change- division by separation with takeover.
The decisions of the CRM were immediately appealed by us by submitting an appeal to the Appeals Commission for decision in the second instance after the decisions of the Central Registry – Trade Register and register of other legal entities as a second instance body, which body upheld our complaints and returned the case to the CRM for re-deciding.
The Commission instructed CRM to be careful when re-deciding, i.e. to explain on what legal basis, the share capital of the acquiring companies must be increased, in a procedure where the entire property of the acquiring company is taken over.
The unfounded position of the CRM was reaffirmed once again, yet again the CRM makes the same decisions and to our great disappointment, our applications were again rejected, without the CRM acting on the guidelines given in the re-decision by the Commission as a second instance body.
On our part, complaints were once again raised against the decisions of the CRM, for which this time the Commission as a second instance body decided meritoriously and finally in our favour.
The Commission, in the explanation of its decision approving the applications for conducting the procedure for status change – division by separation with takeover, only confirmed our legal position, that CRM incorrectly applied the provisions of the Company Law where such takeover procedures are regulated, confirmed that our agreement is correct and is in full accordance with Article 520 of the Law, where the Company Law does not provide for a mandatory increase of the share capital in case of a procedure for status change – division by separation with takeover.
III. Legal uncertainty
In accordance with all of the above, i.e. the incorrect application of the Company Law by the CRM and the failure to make a difference as to what is the basic capital of company, as opposed to being the asset of the company and the manner in which asset is taken over in such status changes, is a justified situation for causing legal uncertainty for all partners / investors in our country.
This is also due to the fact that the CRM as a competent body should know that the immutability of this position that whenever a takeover procedure occurs the share capital of the acquiring companies must increase, is a blow to the business freedom of partners / shareholders / investors and in the case of Article 534 of the Company Law which clearly leaves at the disposal of the participants in the procedures for status changes whether they will choose to increase the share capital or not.
From a legal point of view, this for us as lawyers who are focused in the field of business law is an unfounded restriction in terms of the fact that, if tomorrow for all our future clients who would request a takeover procedure (M&A), we would have to inform them that the law does not need to increase the share capital, but in order for the procedure in the CRM to pass immediately, in order to avoid the long period of appeals, it is better to implement it by increasing the share capital in the acquiring company.
We point out that the Company Law should be applied in practice in accordance with business freedom in conducting such capital transactions, and in terms of better entrepreneurship.
CRM must keep in mind that there is a difference between the transfer of core capital and the takeover of company asset during the takeover procedure, otherwise legal uncertainty for us lawyers will be present in each new procedure, where the partners/shareholders will want to take over, merge and divide.
We believe that this case study of ours, however, is a positive example of confirmation of the correct position that we had taken from the very beginning and is now a practice if in the future we face this or a similar problem with CRM.
If you need to carry out such capital transactions in the field of M&A, our law office is ready to provide you the right legal services. In such procedures, our team is composed of certified accountants and auditors, and handling such procedures by our law office will be secured not only from a legal point, but also from a financial aspect.