Author: José María Bové, Chairman
Read the article published in Economist & Jurist here.
There is a dual conviction of those who believe that the inorganic growth of Spanish companies – through the acquisition of other, national or international, companies or through mergers with other firms with similar characteristics – is an option that has been wasted by the country’s business community and corporate executives, and also that it is preferable to opt for an operation that guarantees the continuity of the business culture of the founders (reinforced, of course) rather than a simple disposal of shares. From this dual conviction, we are going to look at a series of matters (commercial, accounting, tax and governance) that should be taken into consideration when we face with this dilemma.
From a commercial point of view, it should be noted that, by virtue of a merger, two or more commercial companies are merged into a single company through the en bloc transfer of their assets and liabilities or, alternatively, the absorption of one or more companies by another existing company. In this case, Article 25 of Law 3/2009 on structural modifications of commercial companies stipulates that in merger operations the exchange rate for the shares, holdings or units of the companies participating in the merger must be established on the basis of the actual value of their assets and liabilities.
That is, the law provides mechanisms to ensure that no shareholder loses his/her economic rights in the new company.
In the field of accounting law, we find a second regulatory pillar, made up of the Accounting and Measurement Standard 19 of the General Accounting Plan on Business Combinations; the Accounting and Measurement Standard 21 of the General Accounting Plan on Transactions between group companies; the Resolution of 5 March 2019, of the Spanish Accounting and Auditing Institute (ICAC), which develops the criteria for the presentation of financial instruments and other accounting issues related to the commercial regulation of limited liability companies (see Chapter X: Structural modifications and change of registered office); and the ICAC Consultations, contained in BOICAC (ICAC’s Official Gazette) 85 of March 2011 and other subsequent BOICACs.
It should also be noted that the accounting impact of the merger on the annual accounts of the acquiring company will depend on the nature of the merger: I) For a merger transaction between non-group companies, the assets and liabilities acquired shall be aggregated directly on the balance sheet at their fair value; and II) In merger transactions between group companies, the assets and liabilities received from the other group company retain their historical cost (this is to avoid recognising capital gains or goodwill arising internally within the group).
A third regulatory pillar – which forms an (attractive) merger facilitating legal framework – is embodied in the so-called special tax neutrality regime (Corporate Income Tax Law). This allows for a deferral in the taxation of possible capital gains that might arise in this type of operation. One of the fundamental requirements for benefiting from this regime is that the reorganisation operation must be carried out for valid economic reasons that justify it.
In addition to the above, other issues related to mergers should be borne in mind. Thus, merging companies should be valued – with the identification of any unrealised capital gains – and an attempt should be made to quantify both economies of scale and multi-year income statement projections, including planning for the achievement of strategic objectives (e.g., the opening of subsidiaries abroad).
One of the advantages of mergers in a growth strategy over other alternatives such as acquisitions or buy-outs is that mergers do not require upfront financing. This factor plays a significant role, even more so if we relate it to the high level of decapitalisation of Spanish SMEs.
Governance is an essential pillar in the context we are dealing with, since it is necessary to determine the management team that will lead the merged business unit, as well as the role of the shareholders, with the appropriate protocol to cover the company’s operational needs. Alongside this comes a list of issues to be analysed by means of protocols to be signed by shareholders (which should even envisage their gradual exit from the company and the valuation of their shares).
We know from empirical evidence that the size of the country’s companies determines their degree of competitiveness, hinders their internationalisation, and threatens their own continuity. Given this, as we have seen, we have sufficient regulatory instruments at our disposal to redirect this pernicious dynamic to the benefit of the strength of the economy.
