In order to separate different business aspects and facilitate the administration, many companies establish their wholly-owned subsidiaries to conduct independent business activities. However, after a period of operation, they acknowledge that the parent-subsidiary upstream merger shall streamline the management apparatus, minimize the operation cost and increase the profits of their business activities. Pursuant to Article 201 of the 2020 Law on Enterprises, the subsidiary may merge into the parent company, in which the parent company shall receive the entire legitimate rights, obligations, interests, and affiliate companies from its subsidiary and the subsidiary shall disappear.
For ordinary merger and acquisition (M&A) transactions, the parties involved in the transactions shall negotiate and reach an agreement on merger contraction terms and charter of the merging company in a careful manner, because these documents shall directly affect shareholders’ or capital-contributing members’ interests and rights in both companies after the M&A completes. However, the parent-subsidiary upstream merger is usually carried out in a simpler manner, wholly depending on the parent company’s decision. In essence, the parent company that owns 100% of the capital of the subsidiary can control the entire operation of the subsidiary, and due to the fact that there is no change in the shares/contributions of the shareholders/capital-contributing members of the parent company as the merging company, so there is no conflict of interests among the shareholders/capital-contributing members.
Although the parent-subsidiary upstream merger procedures are simpler than that of an ordinary M&A transaction, both parties still have to make a plan and implement it in a careful manner in accordance with law provisions. The procedures for merger are prescribed as follows:
1. Approval of the merge policy
In a parent-subsidiary upstream merger, each company must have a separate internal approval in accordance with the law on enterprises and its operation charter. Depending on the enterprise type, the merger shall be approved by different authorities. To be specific: The authority competent to approve the merger of a joint-stock company; limited liability company with two or more members or a single-member limited liability company is the General Meeting of Shareholders; Members’ Council or the company president/Chairperson of the Members’ Council, respectively.
2. Appraisal of the subsidiary
Both parties must clearly identify the subsidiary’s status through the appraisal, which shall serve as the basis for making the parent-subsidiary upstream merger plan, including:
- Existing assets of the subsidiary, including intangible assets and tangible assets; assets subject to ownership registration and those not subject to ownership registration.
- The list of investment projects of the subsidiary, including production projects, real estate business projects, etc.
- The list of the subsidiary’s employees, including those who work under indefinite-term and definite-term contracts, seasonal contracts; position and title of each employee; other criteria depending on the parties’ purposes, such as education, qualification, age and experience, etc.
- The list of customers, counterparties, suppliers, creditors, etc. whose transactions with the subsidiary are still valid. In which, the parties’ rights and obligations as agreed in the contracts and the contract performance schedule shall be specified; especially, binding terms that may affect or restrict the company merger or re-organization should be examined.
- The subsidiary’s legal status, including disputes and complaints that the subsidiary is involved in as a defendant, plaintiff or persons with related rights and interests; the observance of the law.
- Other issues deemed necessary by both parties, which are relevant to the business characteristics of the subsidiary.
3. Plan making
Based on the aforementioned appraisal result, the parties shall make a specific plan for each task, time and implementation procedure. The plan shall be made on the principles of the parent company receiving the entire legitimate rights, obligations, interests and affiliate companies from the subsidiary. During the plan formulation, the following issues should be paid attention to:
- Making the merger contract with sufficient information specified in Article 201 of the 2020 Law on Enterprises. In accordance with law provisions, the parent company is obligated to send this merger contract to all creditors and notify the employees within 15 days from the date of approval. Therefore, the parent company should review and consider whether the merger contract contents are appropriate for the disclosure of information to the third party.
- Clearly determining administrative procedures to be implemented and appropriate time for implementation, including procedures for registration for change of enterprise information at the business registration agency; change of investment project information (if any); request for re-grant of business licenses for the parent company according to the subsidiary’s business operation (if any); updating information of the owners of assets subject to ownership registration such as real estates, intellectual property rights, etc.
- The parent company should sign in documents and agreements on transferring the entire rights and obligations to the parent company with individuals/organizations whose transactions with the subsidiary are still valid. Although after the merger, the parent company shall automatically be entitled to legitimate rights and interests and take responsible for unfulfilled obligations or unpaid debts and other asset-related obligations of the subsidiary in accordance with law provisions, the conclusion of transfer agreements shall create favorable conditions for the parent company when conducting transactions.
- In case the parent company carries out the layoffs due to the lump of labor, the parent company should solve it appropriately in accordance with law provisions in order to minimize the risk of compensation for the employees due to illegally unilateral termination of labor contracts.
4. Implementation of a merger
When implementing a merger according to the above-mentioned plan, there might be many unexpected issues, the parties should flexibly solve them to ensure the merger is carried out in accordance with law provisions.
Although the parent-subsidiary upstream merger has internal characteristics and is dependent on the parent company’s decision, both companies are required to carefully study relevant laws in order to ensure a smooth merger in accordance with law provisions.
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