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New Legislation Impacting Transformations of Companies and Introduction of Spin-Offs

New Legislation Impacting Transformations of Companies and Introduction of Spin-Offs

Issue 11.3
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Recently, Slovak legislation underwent a significant change with the adoption of the Act on Transformations of Commercial Companies and Cooperatives. Effective as of March 1, 2024, the act marks a departure from previous regulations within the Slovak Commercial Code, which had grown rather inflexible and outdated in the area of corporate transformations.

With the new act – implementing Directive (EU) 2019/2121 – legislators sought to create a unified and transparent legal regulation concerning mergers, acquisitions, and divisions of companies and cooperatives. It also regulates changes to a company’s legal form and cross-border alternatives. Finally, for the first time, it introduces the option of spin-offs in the Slovak legal system. In general, this new law was very much in demand by the legal practitioners and the M&A market, and its adoption provides a modern and uniform legal regulation in this area.

Spin-Offs

One notable aspect of the new law is the implementation of the legal institute of a spin-off, allowing a company that is being divided to continue to exist while part of its capital/assets is passed to another existing or newly created company. Under the previous regulation, the divided company had to cease to exist, so the new legislation represents a substantive update and follows a more modern and common approach.

The conditions for spin-off implementation are duly defined in the law. A spin-off is exclusively permitted in the case of a division involving a joint-stock or limited liability company. A spin-off is not allowed if (1) the equity of the company being divided is lower than its registered capital, (2) the successor company has a different legal form, or (3) one (or more) of the participating companies is in liquidation.

The spin-off can be implemented as either a merger spin-off or an amalgamation spin-off. A merger spin-off is a procedure where part of the company being divided is transferred to the existing company. An amalgamation spin-off means that the capital/assets are transferred to a company created as a result of the spin-off.

Since this form of demerger is widely used abroad, a high demand for it can be expected in the Slovak jurisdiction, where, until now, a demerger in the form of transferring part of the business or individual assets was widely used instead.

Cross-Border Regulation

The new law also adopts an updated and complex regulation of cross-border mergers and introduces new legal institutes: cross-border division and cross-border change of legal form. The adoption of these new institutes is based on EU regulations and aims to support the mobility of legal persons within the EU market.

These newly adopted cross-border regulations apply if one of the participating entities or the successor entity is a Slovak company while at least one other participating entity or the successor entity is a foreign company. However, unlike in the case of domestic mergers and divisions, the law also introduces several restrictions, in particular in the case of cross-border divisions where only amalgamation divisions are allowed – i.e., a division when the successor entity is an entity newly established as a result of the division.

Furthermore, a change of the legal form allows companies to transform into a different form of a commercial company or into a cooperative. A change in the legal form does not dissolve the company. Instead, it only changes its legal form. In that respect, the new legislation introduces provisions for cross-border changes of the legal form by enabling a company registered in the commercial register of its home EU member state to relocate to another EU member state (by relocating its registered seat) while simultaneously changing its legal form to a different legal form recognized by the law of the receiving EU member state. However, there are certain limitations to this new instrument. In particular, the possibility of cross-border changes in the legal form is limited to Slovak and foreign limited liability companies and joint-stock companies seeking to alter their legal structure across borders.

In general, the adoption of the new complex regulation, implementation of new institutes, and transposition of EU legislation can be seen in a positive light, and new forms and structures of M&A deals, allowing more options and flexibility for the investors, can be expected in the Slovak jurisdiction soon.

By Peter Makys, Partner, and Natalia Polomska, Paralegal, Ments

This article was originally published in Issue 11.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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