Understanding legal regulations on division of a company

In the current unstable market economy, many businesses choose to reorganize in the hope of overcoming the common difficulties faced by the economy. One of the forms of business reorganization being chosen is a division of a company. However, what constitutes a company division, and what are the procedures and legal regulations governing such a division. Through this article, NPLaw provides readers with legal information regarding a company division.

I. Current situation of division of a company

Regarded as a country with a rapidly growing economy and stable policy, Vietnam has become an attractive investment destination and is expected to emerge as a developing nation in the near future. As a result, M&A activities in Vietnam have become increasingly attractive and are forecasted to grow rapidly in the coming years. Economic experts have commented that Vietnam's M&A market is becoming a promising one, with an annual growth rate of up to 30–40%.

In the post-Covid period, many companies have tended to restructure to work and grow more effectively. Currently, while the frequency of company divisions may be slowing, this does not mean it has ceased. Businesses still show interest in and apply this form of reorganization to optimize their investment and business operations.

II. Legal provisions relating to division of a company

1. What is a division of a company?

According to Clause 1, Article 198 of the 2020 Law on Enterprise regarding a division of a company, it is stated that:

- A limited liability company or joint-stock company may divide its assets, rights and obligations, members, and shareholders (hereinafter referred to as the divided company) to establish two or more new companies.

Thus, a company division refers to a business reorganization activity applied to limited liability companies or joint-stock companies, whereby the assets, rights and obligations, members, or shareholders of the existing company are split to form two or more new companies.

- Distinction between Company Division and Company Separation

Similarities:

+ Both division and separation are forms of business reorganization under the 2020 Law on Enterprise and only apply to joint-stock companies or limited liability companies.

+ The types of legal entities formed after a division or separation must be the same as that of the pre-existing company.

+ The new entities formed after a division or separation inherit all legal rights, obligations, and interests according to the resolution/decision on the division or separation, and are jointly responsible for any outstanding debts, labor contracts, and other property obligations.

Differences:

+ Legal Consequences: Dividing a company results in the termination of the existing company and the formation of new companies. In contrast, separating a company does not terminate the original company but adds one or more new companies.

+ Execution Method: In a division, all assets, rights, obligations, members, and shareholders are divided among the new companies. In a separation, only part of these elements are transferred to the new companies.

2. Legal consequences of the division of a company

According to Clause 4, Article 198 of the Law on Enterprise 2020:

- The divided company shall cease to exist after the new companies are issued Enterprise Registration Certificates. The new companies are jointly responsible for the obligations, outstanding debts, labor contracts, and other asset obligations of the divided company or must reach agreements with creditors, customers, and employees regarding the fulfillment of these obligations by one of them. The new companies automatically inherit all rights, obligations, and legitimate interests as divided per the resolution or decision on company division.

Therefore, after the division, the divided company will cease to exist. The newly formed companies will be issued Enterprise Registration Certificates and will begin operations.

3. Procedures for the division of a company

According to Clauses 2 and 4 of Article 198 of the Law on Enterprise 2020, the procedures and process for dividing a company includes:

Step 1: Hold a meeting of the Members’ Council, the General Meeting of Shareholders, or the company owner of the divided company to pass a resolution or decision on the division in accordance with enterprise laws and the company charter.
The resolution/decision must contain: the name and address of the divided company's headquarters; names of the new companies; principles, methods, and procedures for dividing company assets; labor usage plan; methods, duration, and procedures for converting contributed capital, shares, or bonds from the divided company to the new companies; principles for settling obligations; timeline for implementing the division. The resolution/decision must be sent to all creditors and notified to employees within 15 days from the date of issuance or approval.

Step 2: Members, owners, or shareholders of the new companies approve their charters, elect or appoint the Chairperson of the Members’ Council, Company President, Board of Directors, and Director/General Director, and register the enterprises as per the Law on Enterprise 2020. The registration dossiers must include the resolution/decision on division under Point a, Clause 2, Article 198.

Step 3: The new companies are issued Enterprise Registration Certificates, and the divided company ceases to exist.

III. Questions related to division of a company

1. When the divided company ceases to exist, do its branches, representative offices, and business locations also cease?

According to Clause 3, Article 73 of Decree 01/2021/NĐ-CP:

- The Business Registration Office shall terminate the existence of branches, representative offices, and business locations of the divided, merged, or consolidated company before the company itself ceases to exist in the National Enterprise Registration Database according to procedures on the National Business Registration Portal.

Thus, when the divided company ceases to exist, its branches, representative offices, and business locations are also terminated accordingly via the national system.

2. What are the conditions for a company to be divided?

According to Clauses 1 and 2, Article 198 of the Law on Enterprise, the conditions for division include:

- The company must be a joint-stock company or a limited liability company.

- A resolution/decision on the division must be approved by the Members’ Council, General Meeting of Shareholders, or the company owner in accordance with the law.

Hence, the conditions for division depend on the company type and proper legal approval of the resolution/decision.

3. Does the divided company continue to exist after the division?

According to Clause 4, Article 198 of the Law on Enterprise 2020, the divided company ceases to exist after the new companies are issued Enterprise Registration Certificates.

Therefore, after the division, the original company no longer exists.

IV. Legal consulting services related to division of a company

Understanding clients’ need to explore legal regulations regarding company division, Ngoc Phu Law Company Limited (NPLaw) is ready to support and advise on legal provisions and procedures related to company division. With extensive experience in providing legal services, NPLaw believes it can bring clients peace of mind and satisfaction when using our services.
Please contact NPLaw for dedicated and prompt consultation by our experienced lawyers through the contact information below: