Audit report in the event of a partial demerger
August 2022 – At the beginning of July 2022, the Information Centre for Company Auditors (ICCI) gave its opinion on whether an audit report should be drawn up on the contribution in kind made in connection with a silent partial demerger. ICCI's conclusion? A change in the law is necessary.
Statement of the situation
LLC "A" owns 100% of the shares of LLC "B". "A" now wants to transfer one of its business lines to its wholly owned subsidiary "B". This is a partial demerger. But is it also a silent partial demerger? And is there a more flexible procedure here, as for a silent partial merger?
A transaction whereby a company transfers its assets and liabilities to another company without dissolution is in principle a transaction which can be equated with a demerger and which can be covered by two provisions of the Companies and Associations Code (CSA), i.e. points 1° and 2° of Article 12:8 CSA:
Art. 28, item 1° assimilates to a demerger the operation by which a company transfers without dissolution part of its assets and liabilities to one or more companies, existing or to be formed, in return for the allocation of shares in the beneficiary company or companies and, if applicable, a cash payment not exceeding one tenth of the nominal value (partial demerger);
Art. 12:8, item 2° deals with the operation whereby a company transfers without dissolution part of its assets and liabilities to another company which is already the holder of all its shares and other securities conferring the right to vote (silent partial division).
Reports to be drawn up in the event of a partial demerger
In principle, there are various reports to be drawn up on the occasion of a partial demerger.
A first report must be drawn up by the administrative body. This is a report on the contribution in which the operation is justified.
A second report must be drawn up by the statutory auditor, the auditor or the external accountant on the demerger proposal. The proposed exchange ratio and the valuation method are among other things discussed in this report. This audit report is not required if all shareholders of each company involved in the demerger have consented to the demerger proposal.
Finally, there is a third report to be drawn up, which is a detailed written report in which the administrative body of each company involved sets out in detail the state of the companies' assets and liabilities, the conditions, etc.
If a second and third report have been prepared, there is no need to prepare a first report.
The ICCI deduces the following:
the report on the contribution in kind is not required if a detailed report has been drawn up by the administrative body and another report has been drawn up by the auditor concerning the partial demerger;
the report on the contribution in kind is mandatory if the shareholders and holders of other securities conferring the right to vote of each company involved in the partial demerger have decided to waive the control reports - the detailed report of the administrative organ and the report of the statutory auditor.
What if it is a silent partial split?
The ICCI notes that there is a more flexible procedure in the case of a silent partial merger, without a control ratio, as such a transaction takes place without an exchange ratio and without a capital increase. The Companies and Associations Code, on the other hand, does not provide for a suitable regime in the case of a silent partial demerger. In other words, the rules for a classic demerger must be applied.
The question is, however, whether this is indeed a silent partial demerger.
The ICCI considers that the transfer of a branch of activity from "A" to "B" is not a silent demerger as referred to in article 12:8, 2° of the ARC - because in this article the transfer takes place from the subsidiary "B" to the parent company "A" which owns all the shares of the transferring company "B". In this case, it is the parent company "A", which owns all the shares of "B", which transfers one of its branches of activity to its wholly owned subsidiary "B".
According to the ICCI, this is therefore a classic partial demerger, and it follows that reports on the contribution in kind must be drawn up if the board of directors and the auditor (or the external auditor or accountant) have not drawn up a report.
If it was not 'A' that owned 100% of the shares in 'B', but 'B' that owned 100% of the shares in 'A', this would have been a silent partial demerger. Although this makes no difference in practice, as there is no simplified procedure for silent partial demergers - comparable to that for silent partial mergers... The ICCI sees this as a shortcoming and concludes that legislative intervention would be desirable. In the meantime, the current provisions, which are admittedly strict, must be applied.
