The subject matter of this article is analysing whether an increase of share capital of a company through the contribution of a business unit must be understood as a corporate segregation in the sense of a structural corporate operation.
We are facing the case of a non-cash contribution by means of which the underwriter of the new shares injects into the company an asset consisting of a business unit. But, what is the actual meaning of “business unit”? It can be defined as a group of assets and liabilities constituting an autonomous economic operation capable of running in the legal system by its own means.
In case said operation is understood as a corporate segregation, the proceedings should be subject to those of Law 3/2009 on Company Structural Modifications, this meaning a slower and more protective proceeding than the ordinary procedure applying to an increase of share capital.
Facts: the Commercial Registry of Jaen denied the inscription of a notarial public deed relating to the increase of share capital of a limited liability company conducted through the contribution of a business unit.
The Registrar based her decision upon the argument that the operation at issue was not a mere increase of share capital, but a corporate segregation as referred to in the said Law 3/2009, where a business unit of an economic concern is transferred as a block in exchange for a number of shares of the recipient company. Additionally, it was argued that the interests of the creditors to the company from which the business unit was segregated should be protected, who have the right to object thereto.
The notary public who granted the public deed at issue challenged the decision of the Registrar and filed a formal objection with the Directorate General of Registries and Notaries (DGRN), which issued a final resolution on the matter on 22nd July 2016. Substantially, the objections brought up by the notary public were accepted and the Registry was ordered to have the document registered. The basis of this resolution was as follows,
a) As pointed out by the Supreme Court, the non-cash contribution of a business unit is different from a total segregation in as much as the contributing company is not wound up as result of said operation and, furthermore, the assets are not perceived by the shareholders of the recipient company, but by the recipient company itself. Therefore, as a consequence, an actual subrogation of the received assets in the company’s net worth takes place. (Supreme Court judgements of 12th January and 3rdMarch 2006).
b) The very DGRN has made it clear that in the operation of increase of share capital by contribution of business unit, even if the recipient company increases its share capital, it does not incorporate the shareholders of the contributing company in its internal framework, instead the new shares or participations are handed over to the contributing company. Thus, since there is no universal succession, the rules applicable to a spin-off operation shall not apply to these cases.
c) There is no such rule imposing the observance of the spin-off process to this type of increase of share capital. Consequently, the shareholders of the contributing company do not have the right to object.
d) That said, the DGRN points out that the position of the shareholders in the contributing companymay become compromised if the contributed business unit were to have an essential character, in which case, a shareholder’s agreement would be necessary, in accordance with article 160.f) of the Spanish Capital Companies Act (LSC). Likewise, this would be necessary if the contribution had the volume and characteristics in relation to the contributing company’s net worth, which allows it to be interpreted as a modification to the asset structure of the contributing company.
In the cases whereby the contribution entails an alteration to the asset structure of the contributing company, the most stringent procedure established by the Law 3/2009 should be observed. Nevertheless, the DGRN clarifies that if the decision had been taken unanimously by the shareholders, this question shall not be relevant to the case and the operation may be verified as a simple increase of share capital.
In the cases of increase of share capital through the contribution of a business unit, the guarantee of protection of third parties remains unaltered, given that due to the nature of the operation, an effective reduction of the guarantee represented by the share capital of the contributing or the beneficiary company does not take place. With regard to the creditors of the contributing company, the operation is of a purely internal nature, and has no implication for the creditors, since they do not give their express consent to the operation.
The position of the employees is also guaranteed by article 44 of the Workers’ Statute, which imposes the subrogation of the new owner of the business unit to the rights and obligations held by the previous owner. Furthermore, it is obligatory to communicate the change in ownership to the representatives of the affected workers.
Finally, from the point of view of the autonomy of the operation of contribution of a business unit to another company, the substantiality and differentiation of the operation is confirmed, following the entering into force of Law 3/2009 and especially, Law 27/2014 on Corporate Tax, the latter differentiating spin-off operations from operations of contribution of a business unit (Article 76.3).
Eduardo Vilá
Vilá Abogados
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14th October 2016
