Corporate reorganization is understood as a way to change the scale and form of an enterprise. The reorganization of corporates will help enterprises improve competitiveness, promote business performance or help enterprises resolve internal conflicts arising to avoid dissolution or bankruptcy. Current forms of corporate restructuring can be mentioned as division, separation, consolidation, merger, or transformation of enterprises.
The purpose when the enterprise is reorganized
As already stated, the reorganization of an enterprise will be set out to achieve certain goals. Among them can be mentioned the purposes such as:
- Your business strategy changes.
- The governance needs of an enterprise’s change.
- Internal conflicts that are currently arising.
- Enterprises planning to improve their competitiveness in the market.
Depending on the purpose that an enterprise sets out to reorganize, there will be a method of implementation suitable to the actual situation. Therefore, the consequences of each implementation method will also be different.
Legal consequences of a corporate reorganization
After reorganizing the enterprise, it may change the business scale of an enterprise, meaning that an enterprise can change from a large-scale enterprise to a smaller-scale enterprise or vice versa.
Additionally, consequences of corporate reorganizations can also change the legal form of enterprises such as the transformation of an enterprise from one form to another. The existence, inheritance and the transfer of legal rights and obligations between enterprises participating in reorganization activities are all characteristics of a corporate reorganization. This helps to minimize unnecessary impacts and influences on existing partners and employees of an enterprise.
In other words, corporate reorganization is an activity that takes place internally between related enterprises and has little impact on rights and obligations with other entities (partners, customers, employees…) due to the mechanism of transferring legal rights and obligations to enterprises after reorganization.
Competence to make the decision
The authority to decide on the reorganization of an enterprise belongs to the company owner, the members’ council for limited liability companies, or the General Meeting of Shareholders for joint-stock companies.
Methods of corporate reorganization
- Company division: this is a form applied to limited liability companies and joint stock companies, whereby it will divide the assets, rights and obligations, members and shareholders of the existing company to establish two or more new companies. A divided company ceases to exist after the new company is granted an Enterprise Registration Certificate.
New companies must be jointly responsible for unpaid obligations and debts, contracts signed with employees and other property obligations of the divided company. In addition, it is necessary to re-negotiate with creditors, customers and employees so that one of the companies will fulfill related obligations.
- Company separation: this form also only applies to limited liability companies and joint stock companies. Company separation will be carried out by transferring a part of existing assets, rights, obligations, members, and shareholders to establish one or several new limited companies or shares without terminating the existence of the separated company.
After business registration, the separated company and the separated company must be jointly responsible for the obligations, unpaid debts, labor contracts and other property obligations of the separated company, except in the case of the separated company, the separated company, creditors, customers and employees of the separated company have other agreements.
- Company merger: A company merger is the fact that one or several companies (hereinafter referred to as the merged company) can be merged into another company (hereinafter referred to as the merging company) by transferring all legal assets, rights, obligations and interests to the merging company, and terminate the existence of the merged company.
- Company consolidation: Is the fact that two or more companies can merge into a new company, and at the same time terminate the existence of the consolidated companies. After the consolidating company registers its business, the consolidated company ceases to exist; The consolidating company enjoys legal rights and benefits and is responsible for the obligations, unpaid debts, labor contracts and other property obligations of the consolidated companies.
- Conversion of enterprise’s form: according to the current Enterprise Law, enterprises are allowed to change their form according to the following provisions: A joint stock company can convert to a limited company form and vice versa, a private enterprise can convert the form of company to a limited company, joint-stock companies and partnerships, the Converting Company automatically inherits all legal rights and interests, is responsible for debts, including tax debts, employment contracts and other obligations of the Converted Company.
Thus, Vietnam’s current Enterprises Law has recognized methods of corporate reorganization to help businesses survive, develop sustainably, and improve competitiveness in the business market. In addition, with increasing competition it will help businesses to improve production and business capacity. Moreover, it will help improve the business efficiency of their enterprises, promoting the search for effective profits.