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CORPORATE REORGANIZATION ISSUES IN UKRAINE AND IN THE USA

31.05.2018 23:03

[Section 1. Economy, organization and administration of enterprises, branches and complexes]

Author: Kasianova Anastasia, PhD, Associate Professor of the Economics and Finance of an Enterprise Department, Kyiv National University of Trade and Economics


Corporations reorganize and restructure themselves for various reasons and in numerous ways. Companies reorganize themselves to increase profits and improve efficiency. The reorganization of a company typically addresses the efficiency component in an attempt to increase profits. Corporate reorganization normally occurs following new acquisitions, buyouts, takeovers, other forms of new ownership, or even the threat of filing for bankruptcy [1]. A reorganization is only feasible where, as an economic matter, the shareholders of the acquired company are willing to continue to own an equity interest in the combined entity.

In tax-free reorganization, the tax attributes of the acquired company will be inherited by the buyer, either directly (in the case of an asset reorganization) or because they are retained by the acquired company itself (where that company remains in existence and its stock is acquired). Similar treatment is available in the case of a taxable stock purchase, but not a taxable asset purchase. In any event, substantial limitations may affect the ability of the buyer to take advantage of loss carryovers and other favorable tax attributes. Countries typically have specific rules for tax-free reorganization in their tax laws. In the USA, the objective of these rules is not to grant a tax exemption to the companies or shareholders involved, but to “neutralize” the tax consequences of business reorganization, so that the reorganization involves neither a tax advantage nor a tax disadvantage. The term “tax-free” is a misnomer because the tax is not eliminated, but will be realized when a later taxable transaction occurs [1]. In other words, reorganization refers to the sale or merger of a company that involves a change in ownership, legal and management level changes, as well as a change in stocks. It is a court-supervised formal process that restructures a company’s finances after it faces bankruptcy. 

In addition to meeting the continuity of interest requirement, reorganization must meet various technical requirements under the U.S. Revenue Code, Part III, Paragraph 368 [3]. The precise requirements vary with the particular form of reorganization used. The Code presupposes seven types of reorganizations which are legislatively declared and collated in four categories. Figure 1 demonstrates a comparative study of categories and types of reorganizations citing the Revenue Code and relying on the source [2] where there was given a comparative study of advantages and disadvantages of different types of corporate reorganizations.




Figure 1. Categories and Types of Corporate Reorganizations in the USA

As to Ukrainian legislation, the term “reorganization” has several interpretations in law depending on the purposes of legal regulation of certain confidential relations. 

The Civil Code of Ukraine [4] practically does not regulate relations of reorganization (this term is mentioned in the Сode only once), addressing them as the issues of termination of activity of one legal entity and creation or transformation of another one. According to the Article 104 of the Civil Code of Ukraine [4], termination of a legal entity occurs as a result of transfer of its property, responsibilities and rights to another legal entity or several succession-seekers in one of the following ways: division, split, transformation, merger, takeover. These are types of reorganization. However, not every reorganization of an enterprise can be connected with terminaton of activitiy because a reorganized enterprise often continues to exist after a new company has split off from it. Such an enterprise needs to make appropriate changes to the statutory documents or to re-register.

Reorganization of an enterprise which misuse its monopoly position at the market may also be carried out through its compulsory division in the manner prescribed by law.

In a broader sense, reorganization is a complete or partial replacement of the owners of corporate rights of an enterprise, is a change in the organizational and legal form of business organization, is elimination of certain structural units or creation of some new ones on the basis an old enterprise, the consequence of which would be a transfer or taking possession of its property, funds, rights and responsibilities by a successor.

The form of the future reorganization of an enterprise is determined, first of all, by the reasons and motives which encourage the owners and management of an enterprise to make reorganization. There are following directions of reorganization in Ukrainian legislation:

(1) integration of a going-concern enterprise. Is carried out by way of merger, consolidation, takeover;

(2) division of a going-concern enterprise. Is carried out by dividing or splitting of an enterprise;

(3) transformation of an enterprise. In this case, changes in size of an enterprise are not stipulated.

Figure 2 summarizes the above-mentioned directions and types of reorganization at Ukrainian enterprises into the following way. 




Figure 2. Directions and Types of Reorganization at Ukrainian Enterprises

Unlike the USA, in Ukraine the tax system does not provide for transactions described above. The types of reorganization presented above reveal their peculiarities which help understand their specification and possibility (as well as impossibility) to choose one of them while reorganizing a company. The variety of divisive, acquisitive and corporate restructuring alternatives enables to apply corporate reorganizations in our country on a broad scale. When the top priority is to make existing business viable by reorganizing it through merger or division, it is necessary to think about Ukrainian rules in civil or commercial law that would allow mergers from the very beginning, acquisitions or divisions, and also to think about their tax implications. The above problem is an object of development in our country further on.

References:

1. How Mergers and Acquisitions Can Affect A Company / [On-line Resource]. – Access mode : http://www.investopedia.com/articles/investing/102914/how-mergers-and-acquisitions-can-affect-company.asp#ixzz4l8l7a7Zk.

2. Kasianova А.О. Corporate Reorganizations: International Experience // А.О. Kasianova. – Зовнішня торгівля: економіка, фінанси, право. – Київ, КНТЕУ, 2018. – №1. – С. 37-48.

3. Definitions Relating to Corporate Reorganizations : U.S. Code, Title 26 – Internal Revenue Code, Subtitle A – Income Taxes, Section 368 [On-line Resource]. – Legal Information Institute. – Access mode : https://www.law.cornell.edu/uscode/text/26/368.

4. Цивільний кодекс України [Civil Code of Ukraine] / [On-line Resource]. – Access mode : http://zakon2.rada.gov.ua/laws/show/435-15/page2.



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