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The New Institutional Framework for Corporate Transformation




May 2020

George Kefalas, LL.M. (mult.), Μ.Sc.

Summary: As of 15.4.2019, Law no. As of 15.15.2019, from 15.15.2019, the procedure and conditions for carrying out all possible forms of corporate transformations have been regulated in detail. This note summarises the possible forms and stages of completion of the transformation, as well as the provisions for the protection of creditors and partners/shareholders of the transformed companies. 

1. Introduction - Possible forms of transformation

The main types of transformations provided for by the Act are. 4601/2019 are three: merger, demerger and conversion. Merger is the process by which a company (existing or newly established) acquires the assets and liabilities of other companies, which are dissolved without the intervention of a liquidation stage. A division is the process whereby the assets and liabilities of a company which is dissolved without going into liquidation are transferred to at least two (existing or newly created) companies. A division is further divided under the new law into a joint division, a partial division and a branch split. The difference between them lies in the fact that, while in a joint division all the assets and liabilities of the company being divided are transferred, in a partial division and a branch split only the assets and liabilities related to a specific branch of the company are transferred (e.g. if a company maintains a production and a trading branch, only one of these two branches can be transferred). However, whereas in a demerger the shares of the beneficiary company are received (in exchange for the contribution of the branch) by the company from which the branch was demerged, in a partial division the shares of the beneficiary company are received by the shareholders of the company from which the branch was demerged. Finally, a conversion is the change in the legal form of a company, e.g. from an EIA to an SA. Therefore, while other types of transformations will always involve more than one company, a conversion always involves a single company. 

2. Stages of transformation implementation

The v. 4601/2019 sets a common framework for the implementation of any form of transformation. The specific stages to be followed are as follows:

- Drafting of a merger or demerger plan by the boards (for SAs) or the managers (for other forms of companies) of the companies involved.

- The registration and publication of this in the GEMI or posting on the relevant websites of all the participating companies (for the mergers and acquisitions (i.e. for the owners of the merging companies and the other types of companies)). 

- Preparation of a report by the Board of Directors or the administrators explaining the terms of the plan and the proposed exchange relationship (in the case of merger and division) or the feasibility of changing the legal form of the company (in the case of conversion).

- Examination of the draft terms of merger or division by independent experts and preparation of a report thereon, unless all the partners or shareholders agree in writing not to examine the draft terms of merger or division.

- Resolution of the general meeting (for SAs with increased quorum and majority) or the meeting of the partners (for LLCs) or the partners.

- Drawing up of the contract or unilateral act of merger or division by notarial deed, if it is an SA or EIA, otherwise by private document. 

- Prudential control of the contract by the management.

- Registration and publication of the merger, division or conversion in the General Register of Companies.

3. In particular the valuation by experts

The new law, aimed at protecting all the interests involved in a transformation, makes it a requirement that the draft contract be examined by independent experts, who prepare a report addressed to the partners' meeting and registered in the GEMI. In their report, the experts state whether - in their scientifically substantiated opinion - the exchange ratio of shareholdings in a merger or division is fair and reasonable (e.g. whether the value of the shares received by the shareholder in the acquiring company actually reflects the value of the shares held in the acquiring company). 

An expert review of the draft contract is not required only if all the shareholders or partners of the companies involved in the transformation agree to it, and in writing. In the case of a partnership involved in the merger or division, an expert review of the draft contract is required only at the request of one of the partners. 

Protection of shareholders and creditors

In order to safeguard the interests of the shareholders of the companies involved in the transformation, Law No. 4601/2019 requires the (each company participating in the transformation) to make available to them all the critical documents of the transformation, so that they can weigh the facts and make a proper decision. Particularly in the case of a public limited company, the documents must be available to shareholders at least one (1) month before the general meeting of the shareholders' meeting that will approve the transformation. These documents are: a) the draft merger or division agreement or the conversion report; b) the report of the board of directors or the managers on the merger or division; c) the report of the independent expert; and d) the annual financial statements and the annual management reports of the board of directors or the managers for the last three (3) years.

Moreover, the protection of shareholders is also ensured by the very requirement of the preparation of a report by independent experts, who are also called upon to give an opinion on the exchange ratio of the securities in the event of a merger or a division. As a remedy, i.e. after the merger or division has been carried out, the shareholders or partners may, within 12 months of the completion of the transformation (i.e. the relevant publication in the General Register of Companies), claim compensation from the company if the exchange ratio of company shares is not fair and equitable, e.g. if the value of their shareholding in the new company in the case of a merger is lower than the value of their shareholding in the merged company.

In particular, in the case of conversion, an SA shareholder or an LLC partner who objects to the conversion may request the redemption of his shares from the company or his exit, respectively, as well as transfer his shares or partnership interests to a third party, even if the articles of association contain transfer prohibitions or restrictions (such as, for example, blocked shares in the case of a SA).  

On the other hand, the protection of creditors is ensured through the provision of appropriate guarantees by the company. In particular, creditors, within thirty (30) days of the publication of the draft merger or division agreement or the decision of the transformation in the General Register of Companies, and if their claims predate such publication, may request appropriate guarantees from the companies and the companies are obliged to provide them if the creditor proves that their financial situation after the completion of the transformation makes it necessary to provide the guarantees. Such guarantees may take any form, such as a personal guarantee by the partner himself, a mortgage on the company's property, etc. In the event of a dispute between the company and its creditors as to the provision of guarantees, the latter may apply for a protective measure by way of an application to the Single Judge Court of First Instance of the company's place of business. 

In particular, in the case of a division, where a company is split into several beneficiary companies, it is provided that the companies resulting from the division (beneficiaries) are jointly and severally liable (i.e. both of them) to the creditor. For example, the division of company A gives rise to companies B and C. Creditor D had a claim against A, which, after the division, was transferred to company B. Therefore, despite the fact that D's relationship was transferred to B, both B and C will be liable to D. However, according to the provision of the law, C's liability will be limited, i.e. up to the net value of the assets (assets - liabilities) received from the division. And in the cases of partial division and branch spin-off, where the company being divided still exists, the divided company is liable to creditors alongside the beneficiaries. 

4. The grounds for invalidity of the transformation

In order to ensure legal certainty and to avoid the painful consequences that would result from the subsequent reversal of a transformation, the law provides for a minimum number of circumstances that could lead to the annulment of a transformation that has already taken place. These cases are as follows:

- If there is no approval (by the general meeting, the partners' meeting or the partners) of any of the companies involved in the transformation.

- If the decision of approval is invalid, void or voidable. 

The annulment of the transformation shall be declared by the court on the application of a shareholder or, in certain cases, a creditor. However, the transformation will not be annulled if the defect is cured before the court's hearing of the application (e.g. the transformation is approved by a subsequent decision of the general meeting of the company participating in the transformation), and the court itself may set a reasonable time limit for this purpose. In any event, the court may not annul the transformation if it considers that this would be disproportionate to the defect in the decision of the company or companies participating in the transformation. In that case, the applicant for annulment of the transformation will be able to claim compensation for any loss suffered. 

What is explicitly stated in the law is that the transformation cannot be annulled on the ground that the exchange relationship between the company's shareholdings is not fair and reasonable. Therefore, a shareholder who finds himself after the transformation with a much lower value of shares than the value of the shares he held before the transformation cannot seek the cancellation of the transformation, but only compensation for the loss suffered.

5. Conclusion

The new law on the law of corporate transformation sets a clear framework for possible transformations and the conditions for their implementation, and contains clear provisions for the protection of all parties involved, shareholders and creditors, as well as for the liability of the directors of each company in the event of culpable damage to the latter. The focus of the law is on ensuring that the transformation takes place, which in practice, once it has taken place, will be very difficult to reverse. Thus, it is intended to be an important tool, in conjunction with the tax incentives provided by other legislation, for the formation of strong economic units that will support the growth of the Greek economy. 

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