A division is an operation whereby a pre-existing business or company is split into 2 or more different and legally independent businesses or companies. The company being split ceases to exist as a result.

A division can be achieved by:

• absorption; or
• incorporation of new companies; or
• a combination of the 2.

Who is concerned

Any company with legal personality and any economic interest group (EIG) may be divided.

A company incorporated under the law of a foreign country may be divided if permitted by the law of the country in question.

Prerequisites

A division is permitted when one or more of the companies or EIGs being absorbed or dissolved is engaged in:

• bankruptcy proceedings; or
• a scheme of composition with creditors; or
• a similar procedure: deferment of payment, controlled management; or
• a procedure to implement special administrative measures or special supervision for one or more of the companies or EIGs.

Division by absorption is permitted when the company being absorbed is in liquidation, on condition that the company's assets have not yet been distributed to the partners.

A société à responsabilité limitée (SARL – limited liability company), a société coopérative (SCOP – cooperative company) or EIG may not take part in a division as a company or EIG unless the partners meet the eligibility criteria to become partners or members of the receiving company/EIG.

Deadlines

The draft terms of the division must be filed with the Registre de Commerce et des Sociétés (RCS – Trade and Companies Register) for publication in the Recueil Electronique des Sociétés et des Associations (RESA – electronic compendium of companies and associations), at least one month prior to the ruling of the general meeting on the division.

How to proceed

Draft terms of the division

The managerial bodies of the companies taking part in the division must produce the draft terms of division in writing. This is a key document for third parties and partners. However, at this preliminary stage, it does not represent a binding commitment on the part of the company.

The draft terms of division must specify:

• the legal form, company name and registered office of the companies taking part in the division;
• the exchange rate for shares or units and, where applicable, the amount of the cash compensation;
• the method by which shares or units in the receiving companies will be allocated;
• the effective date from which:
  • these units or shares entitle the holder to share in the profits of the new companies, and any specific conditions attaching to that entitlement;
  • the transactions of the company being split are considered to be complete from a bookkeeping standpoint;
• the rights conferred by the receiving companies on partners enjoying special rights or on holders of securities other than shares or units, or the measures proposed concerning them;
• all special benefits conferred upon experts, members of the managerial bodies and corporate auditors of the companies involved in the division;
• a detailed list of the assets and liabilities to be transferred to each of the receiving companies, and how they will be apportioned to the latter;
• how the shares or units in the receiving companies will be apportioned to the partners of the company being split, and the criterion upon which this apportionment is based.

If an asset and/or liability item has not been apportioned in the draft terms of division, and its apportionment cannot be determined from the latter, if the item is:

• an asset: that asset or its value equivalent is divided between the receiving companies in proportion to the assets apportioned to each of them in the draft terms; or
• a liability: each of the receiving companies is jointly liable.

Enactment of the division

Company management's report on the terms of the division

The report from the management of the companies taking part in the division is sent to the companies' partners. It explains the legal and economic grounds for the planned division and, in particular, the ratio applicable to the exchange of units or shares.

Statutory auditor's or expert's report on the terms of the division

The statutory auditor produces a report on the terms of the division for each company. Their intervention is mandatory.

However, the managerial teams of the companies involved may agree to appoint an independent expert. That expert will be appointed by the President of a district court.

The report must specify:

• whether the exchange ratio is relevant and reasonable;
• the method or methods employed to arrive at the proposed exchange ratio;
• whether such methods are appropriate;
• the values arrived at using each of the methods;
• the relative importance of each method in determining the final value;
• any specific difficulties encountered in carrying out the assessment.

Procedures for communicating with partners

A corporate division is a complex procedure. As such, it is important to ensure that partners are able to make decisions in full awareness of the facts. Thus, all partners must be able to exercise their right:

• at least one month prior to the general meeting which is to rule on the common draft terms of division;
• to examine the following documents at the registered office:
  • the common draft terms of division;
  • the annual financial statements;
  • the last 3 annual management reports for each of the companies in question;
  • where applicable, an accounting statement closed on a date which must not be earlier than the first day of the third month preceding the date of the common draft terms of division, if the latest annual accounts relate to a financial year that ended more than 6 months before said date;
  • where applicable, the management's and the auditor's reports on the division.

Each partner is entitled to this information upon request, free of charge. If the partners so agree, the company may circulate this information electronically, or publish it online.

Decision to divide the company

A division requires the approval of the partners, shareholders or holders of securities carrying voting rights in each of the companies in question.

The decision is subject to the same conditions of quorum and majority as for the articles of association.

The minutes of general meetings which decide upon the division or, where the division does not require the approval of the general meetings, the draft terms of division, are established by notarial deed. The notary must verify and certify the existence and legality:

• of the deeds and formalities required of the company on whose behalf they are acting;
• of the draft terms of division.

Generally speaking, the approval of all partners is required in partnerships, and of the holders of capital securities, as their rights will be affected.

The approval of all partners is required when the companies being split or the receiving companies are:

• general partnerships (sociétés en nom collectif – SENC);
• cooperative partnerships in which the partners are jointly and severally liable;
• civil companies;
• economic interest groups.

The approval of all partners is required for the companies being split where the receiving company is:

• a SENC: the agreement of all general partners is also required; 
• an SCS (limited partnership);
• a cooperative partnership in which the partners are jointly and severally liable: the approval of all general partners is also required;
• a civil company;
• an EIG.

The unanimous approval of holders of non-capital securities is required when the companies being split, or the receiving companies, are:

• SENCs;
• cooperative partnerships in which the partners are jointly and severally liable;
• civil companies or EIGs;

In other cases, the division does not need to be approved by the general meeting of the receiving company if:

• the details of the receiving company were filed with the RCS for publication in the RESA at least a month prior to the date of the general meeting ruling on the common draft terms of division of the company/companies to divide;
• all of the partners in the receiving company were able to examine all of the relevant documents at the head office;
• one or more partners in the receiving company, holding at least 5% of shares or units in the subscribed capital, are entitled to call, by no later than the day following the general meeting of the company being split, a general meeting of the receiving company to rule on whether to approve the division.

Rights of creditors, bond-holders and holders of securities carrying special entitlements

Creditors and bond-holders in the companies taking part in a division, whose receivables pre-date the publication of the notification of the division in the RESA, may demand securities in respect of their receivables, provided they can demonstrate that:

• the division prejudices their ability to exercise their rights;
• the company:
  • has not provided them with adequate guarantees;
  • does not have sufficient guarantees available.

The request must be sent, within 2 months, to the district court having jurisdiction over the district where the debtor company's registered office is located. Such a request will not halt the division.

The debtor company may void the request by settling the debt owed to the creditor. Should they fail to do so, if the security is not provided by the set deadline, then the debt is payable immediately.

The receiving companies are jointly liable to the creditor or bond-holder of the split company who has not obtained satisfaction from the company to which the receivable has been transferred. However, the joint liability of the receiving companies is limited to the net assets apportioned to each of them.

The holders of securities, other than shares or units, carrying special rights, must enjoy rights in the new companies at least equivalent to those which they enjoyed in the company being split. This principle does not apply if a change in those rights had been duly approved by a general meeting of the holders of said securities, ruling in the same conditions required for a change to the articles of association. In the event of differences of opinion, the securities in question can be redeemed at the price at which they were valued in the draft terms of division.

Liability

The following dissolved companies and their partners are liable, jointly or severally as applicable, to third parties for the undertakings of the dissolved company made prior to the division, and to the date on which the division is enforceable against third parties:

• SENCs and their partners;
• SCSs and their partners;
• société en commandite par actions (SCA – partnership limited by shares) and their partners;
• cooperative partnerships in which the partners are jointly and severally liable;
• civil companies and their partners;
• EIGs and their members.

However, they may be exempted from such liability by an express clause inserted into the draft terms of division and the notification of division duly published in the RESA.

The following receiving companies and their partners are liable to third parties, either jointly or severally, for any undertakings made by the dissolved company prior to the division, and which, through the division, are transferred to the receiving company:

• SENCs and their partners;
• SCSs and their partners;
• SCAs and their partners;
• cooperative partnerships in which the partners are jointly and severally liable;
• civil companies and their partners;
• EIGs and their members.

Publicising the division and entry into force

The division takes effect when the necessary decisions have been made within the companies in question.

The division has no effect with respect to third parties until the required documentation has been published in the RESA.

The receiving company may undertake all publication formalities incumbent upon the split company.

Protection of partners in the split company

The partners in the split company who believe that their interests have been harmed may hold the members of the governing bodies and the experts involved in the division liable for misconduct.  

Effects of a division

Dissolution of the split company

The split company is dissolved and ceases to exist as a legal entity.

Transfer of assets and liabilities

The assets and liabilities of the split company are transferred to the receiving company. This transfer is automatic and does not require and specific formalities.

However, to be enforceable against third parties, the transfer must comply with the specific laws on ownership rights applicable to:

• movable or immovable assets;
• industrial or intellectual property;
• real rights other than securities.

The liabilities to be transferred include both known debts and any debts which may not have been disclosed during the division process.

Partners

The partners in the split company become partners in one or more of the receiving companies, as per the apportionment provided for in the draft terms of division.

Contracts

Ongoing contracts, including employment contracts, are automatically transferred to the receiving company.

In partnerships wherein the partners are personally liable, these individual partners:

• are liable for the undertakings made by the dissolved company prior to the division;
• may be discharged of that liability by an express clause inserted into the draft terms of division and the published notification of that division.

Transfer of assets and branches of activity, or universal transfer

As a variant of the restructuring process, 2 companies may agree:

• that one company will transfer a portion of its assets to another company. In that case, the partners in the transferring company do not automatically become partners in the other company;
• that one company will transfer a branch of its activities to another company forming an entity which:
  • engages in its activities independently;
  • from a technical and organisational point of view, can operate on its own;
• on a universal transfer: one company transfers all of its assets and liabilities to one or more existing or new companies.

 In these 3 cases:

• the transferring company is not dissolved;
• the transfer entails the automatic transfer of assets and liabilities attaching thereto to the receiving company;
• the shares in the transferring company are not cancelled;
• the consideration consists of shares or units in the receiving company/companies.

Taxation

Every legal stage in the division process is taxed separately. The operation may sometimes prove extremely costly in terms of taxes. However, a preferential treatment regime has been implemented to:

• make divisions as simple as possible from a tax point of view;
• safeguard the Inland Revenue's rights over any latent capital gains existing on the day of the division.

Nullity of a division

A division can only be declared null and void by a court. Proceedings to have a court declare a division null and void can only be brought within 6 months of the publication of the notice thereof. The court may grant the company time to rectify the situation.

Causes of annulment are:

• the absence of a notarial deed or a private document, as applicable;
• nullity of decision to divide a company.

The decision nullifying the division must be published in the RESA. The receiving company remains bound by its contractual obligations.

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