Nowadays, enterprises plays a very important role in the economic development of the country. However, businesses activities always carry many risks, and enterprises can incur losses leading to bankruptcy. Therefore, it is necessary to change and restructure the scale to be more suitable with actual situation. Thus, enterprises choose to reorganize according to the legal provisions. So, how is this issue regulated? Let’s explore it with NPLaw in this article.
I. What is enterprise reorganization?
Enterprise reorganization is a measure to change the scale or type, according to the decision of the enterprise owner, suitable for each business stage. Pursuant to Clause 31 Article 4 of Enterprise Law 2020, enterprise reorganization means division, seperation, merger, consolidation or conversion of the enterprise types.
II. Subjects of enterprise reorganization
Enterprise reorganization can occur in all types of enterprise. However, due to the needs of state management and legal adjustment requirements, enterprise reorganization may only be applicable to one or a few specific types of enterprise. Specifically, limited liability companies and joint-stock companies can be reorganized through division, seperation, consolidation, or merger. Additionally, for sole proprietorships, due to the nature of having a single owner and each individual being allowed to establish only one sole proprietorship, reorganization for sole proprietorships can only be applied when converting into a general partnership, limited liability company, or joint-stock company.
III. Characteristics of enterprise reorganization
Enterprise reorganization has the following basic characteristics:
Firstly, regarding the subject performing the reorganization, certain conditions must be met. The subject performing the enterprise reorganization must be an economic organization that meets the conditions, such as having a proper name, separate assets, a stable headquarters, being legally registered, and having an organization structure as prescribed by law.
Secondly, regarding the nature: enterprise reorganization is an activity that change the legal status and business scale of the enterprise. This activity results in the formation of new enterprises, and may even of a different type, and increases the business scale of the enterprise. However, enterprise reorganization can also terminate the legal status of certain enterprises.
Thirdly, regarding legal consequences: enterprise reorganization is an internal activity among the involved enterprises and minimally affects the rights and obligations with the partners due to the machanism of transferring legal rights and obligations to the post-reorganization enterprise.
Fourth, regarding forms, enterprise reorganization takes place in various forms, including division, separation, merger, consolidation, and conversion of enterprises.
IV. Forms of enterprise reorganization
Based on Chapter IX of the Enterprise Law 2020, which stipulates the forms of enterprise reorganization, there are 5 forms, including:
1. Division of a company
According to Article 198 of the Enterprise Law 2020, division of a company is a case where a company is divided into two or more new companies and the old company ceases to exist. The rights and obligations of the divided company are transferred to the new companies. Limited liability companies and joint-stock companies can divide the assets, rights, obligations, members, and shareholders of the existing company (hereinafter referred to as the divided company) to establish two or more new companies.
2. Seperation of a company
According to Article 199 of the Enterprise Law 2020, seperation of a company is a measure to transfer a part of the assets, rights, obligations, members, and shareholders of the existing company (hereinafter referred to as the seperated company) to establish one or more new limited liability companies or joint-stock companies without ceasing the existance of the seperated company.
Limited liability company, joint-stock company can be separate by transferring a part of assets, rights, obligations, members, and shareholders of the existing company (hereinafter referred to as the seperated company) to establish one or more new limited liability companies or joint-stock companies without ceasing the existance of the seperated company.
3. Consolidation of companies
According to Article 200 of the Enterprise Law 2020, two or more companies (hereinafter referred to as the consolidating companies) can consolidate into a new company (hereinafter referred to as the consolidated company), simultaneously ceasing the existance of the consolidating companies.
4. Merger of companies
According to Article 201 of the Enterprise Law 2020, one or more companies (hereinafter referred to as the merging companies) can merge into another company (hereinafter referred to as the merged company) by transferring all assets, rights, obligations, and legitimate interests to the merged company, simultaneously ceasing the existence of the merging company.
5. Conversion of enterprise type
Conversion of enterprise type is regulated from Article 202 to 205 of the Enterprise Law 2020. It includes:
- Conversion of a limited liability company into a joint-stock company.
- Conversion of a joint-stock company into a single-member limited liability company.
- Conversion of a joint-stock company into a two-member or more limited liability company.
- Conversion of a sole proprietorship into a limited liability company, joint-stock company, general partnership.
V. Cases where enterprise reorganization is recommended
Enterprise reorganization is typically considered when: the company’s business strategy changes; the need for company management changes; disputes arise among the company’s owners; the company lacks members, resulting in the number of members falling below the minimum threshold; or the need to enhance competitive capacity.
VI. Differences between division and separation of a company
The notable differences between division and separation of a company are illustrated by the following criteria:
|
Division of a company |
Separation of a company |
|
|
Method |
Divides assets, rights and obligations, members, shareholders of the existing company into the divided companies. |
Transfers a portion of the assets, rights, obligations, members, shareholders of the existing compnay to the separated company without ceasing the existence of the original company. |
|
Legal consequences |
After the new companies receive their Enterprise Registration Certificates, the divided company ceases to exist. One or more new companies can choose any type of company, including general partnerships. |
Both the separated company and the original company contine to operate after the separation. The new companies can only be joint-stock companies or limited liability companies. |
|
Legal responsiblity |
The new companies are jointly and severally liable for the obligations, unpaid debts, labor contracts, and other property obligations of the divided company, or they agree with creditors, customers, and employees for one of these companies to fulfill this obligation. |
The origianl company and the separated company are jointly and severally liable for the obligations, unpaid debts, labor contracts, and other property obligations of the original company, unless otherwise agreed. The separated companies inherit all legitimate rights, obligations, and interests as divided according to the company’s separation resolution or decision. |
VII. Answers to questions about enterprise reorganization
1. Does enterprise reorganization require tax registration?
According to the Tax Management Law 2019, regarding tax registration in cases of enterprise reorganization, taxpayers who register for tax along with enterprise registration, cooperative registration and business registration when reorganizing the enterprise must also register for tax along with enterprise registration, cooperative registration registration, and business registration as prescribed by law. Taxpayers who register for tax directly with the tax authority when reorganizing an enterprise must terminate the tax code for the divided, merged, or consolidated entity or update information for the seperated entity, and register new or update information for the new entity after division, separation, merger, or consolidation.
Thus, in both cases of “tax registration along with enterprise registration” and “direct tax registration with the tax authority”, when reorganizing the enterprise, the tax registration must be fulfilled.
2. Does a public company need to disclose unusual information when deciding to reorganize the enterprise?
Pursuant to point e, Clause 1 Article 11 on the disclosure of unusual information in Circular No. 96/2020/TT-BTC guiding the disclosure of information on the securities market, a public company must disclose unusual information within 24 hours from the occurrence of one of the events: Decision on enterprise reorganization (division, separation, merger, consolidation, conversion of enterprise type)…
Therefore, a public company that decides to reorganize the enterprise must disclose unusual information within 24 hours.
3. Is the conversion of an enterprise type a form of enterprise reorganization?
Pursuant to clause 31 Article 4 of the Enterprise Law 2020, enterprise reorganization is the division, separation, merger, consolidation, or conversion of the enterprise type. Therefore, the conversion of an enterprise type is a form of enterprise reorganization.
VIII. Enterprise reorganization consulting services
Currently, there are many law firms/law companies providing consulting services on enterprise reorganization. Among them, NPLaw is a company that always meets the trust of clients. With many years of consulting experience, NPLaw is proud to be a professional unit providing services related to enterprise reorganization. Our company advises clients on the current legal regulations on enterprise reorganization; drafts documents to serve the procedures; represents clients in carrying out procedures at the Business Registration Office; represents clients in receiving results and handing over results to clients.
The above is information answering questions about enterprise reorganization that NPLaw sends to readers. If you have any questions that need further clarification, please contact NPLaw at the following contact information.
