When deciding to carry out restructuring, numerous companies choose the beginning of a new fiscal year as the date of the restructuring, that is, typically 1 January. Given that many companies are now preparing to go ahead, we wish to summarise the key milestones of company restructuring from a valuer’s point of view: when an expert opinion should be obtained, when valuation is reflected in accounting, and what should be kept in mind.
When expert opinions are necessary
Act No. 125/2008 Sb., on Company and Cooperative Restructuring (“Restructuring Act”) clearly defines cases in which there is an obligation to have assets valued by an expert opinion. Simply put, these are cases when, as a result of the restructuring, registered capital is created in a new joint-stock company or a limited liability company, or the registered capital of the successor company is increased from the capital of the dissolving company. The particular situations are the following:
- Merger by acquisition – the dissolving company’s asset valuation is required if the successor company’s registered capital is to be increased from the dissolving company’s capital;
- Consolidation – asset valuation is required in respect of all dissolving companies;
- Demerger (split-up or spin-off) with the formation of new companies – asset valuation is required for the assets to be transferred/spun off;
- Demerger (split-up or spin-off) by acquisition – the demerging company’s asset valuation is required if the successor company’s registered capital is to be increased from the dissolving/demerging company’s capital;
- Change of legal form – asset valuation is required at all times.
Please note that the above list of cases when valuation and expert opinions are required under the Restructuring Act is not exhaustive (an expert opinion is also necessary in cases such as those set out in Section 5a of the Restructuring Act, in reviewing the amount of reasonable settlement upon asset transfer, and in reviewing the reasonable amount of the settlement share upon exercise of the buy-out right).
When valuation is reflected in accounting
When a company embarks on restructuring, its equity may be affected by asset valuation determined in an expert opinion. This happens in restructuring in the form of a merger or demerger when the law prescribes a duty to have the assets valued in an expert opinion. The valuation is subsequently reflected in the company’s accounting (in the opening balance sheet). In the event of a change of legal form, for which valuation is also required by law, the valuation is not reflected in the accounting (this also applies to the asset taken over by the sole shareholder).
In this respect, please note that mergers of a parent company with a subsidiary are subject to the rules prescribed by the Restructuring Act (Section 75 (2)) preventing “playing up” the registered capital by means of double accounting for the value of the assets (effective since 1 January 2012). The Act imposes an obligation on experts to reflect in the asset value determined in the opinion a decrease equal to the acquisition cost of the share in the subsidiary held by the parent company (in a merger of the subsidiary into the parent company as the successor company) or equal to the fair market value of the shareholding in the successor company held by the dissolving company (in a merger of the parent company into the subsidiary as the successor company). So in a merger of a subsidiary into the parent (successor) company, the registered capital of the successor company can be increased from the assets of the dissolving company even if 100% of the subsidiary is merged with the parent company, provided that the acquisition cost of the shareholding shown in the parent company’s accounting is lower than the value of the subsidiary’s assets determined in the valuation.
What should be taken into account in restructuring
In our opinion, caution should be exercised particularly in the choice of the “future” date of the restructuring (which is selected after the date of execution of the draft terms of the merger) as well as in filing an application for the court appointment of an expert.
Under applicable laws, asset valuation for a merger or demerger is required as at the date of the latest annual, extraordinary or closing financial statements prepared before the execution of the draft terms of the restructuring. If the restructuring date is selected after the date of the draft terms of the restructuring (which has been allowed by an amendment to the law effective since 1 January 2012), a long delay may occur between the valuation date and the date of the opening balance sheet in which the revaluation is to be presented, depending on the required valuation date. In an extreme case, the time difference may even be 12 months. The value of the object of the valuation may significantly change over such a long period. Therefore, for such cases, the professional public recommends considering an update of the valuation as at the restructuring date.
If a “future” merger or demerger date is selected, determining a reasonable exchange ratio (including additional payments, if any) can also become difficult. The exchange ratio must be assessed considering the status as at the merger or demerger date. If a future date is selected as the date of the restructuring, input data for determining the exchange ratio can only be estimated. The real state of assets of the participating companies as at the date of the restructuring will only be clear in the future. If the actual situation is different as at the date of the restructuring, those entitled will have the right to an additional payment.
In most cases where an expert opinion is necessary, the Restructuring Act requires it to be prepared by a court-appointed expert. For such purposes, the company (or its authorised legal representative), as the applicant, must request the competent court to appoint a proposed expert for a specific case. Since 1 January 2014, the applications must be filed with a district court having local jurisdiction (by the end of 2013, applications were filed with regional courts).
RSM TACOMA Valuation has extensive experience in company restructuring and is ready to assist you in this respect.