Merger premium

By means of Official Letter 115-111035 of August 28, 2009, the Superintendence of Companies pronounced itself on the concept of "Merger Premium" applicable to reorganization operations in Colombia. Unfortunately, such pronouncement was conceptually erroneous, generated confusion because it was unintelligible and departed from the international meaning of such term and its treatment under international financial reporting standards (IFRS).

On that occasion, the Superintendency stated that the merger premium occurred when the partners or shareholders decided to maintain the nominal value of the shares of the absorbing company, respecting "in all cases the number of quota shares or parts of interest that will correspond to each associate according to the exchange ratio". Likewise, it stated that "since the merger premium has its origin in the capital contributed by the absorbing company", it could be reduced, returned or reimbursed to the associates in accordance with the provisions of Article 145 of the Code of Commerce.

Thus, according to the controlling entity, if a company ("company 1"), with a single shareholder ("shareholder A"), whose equity is COP 1,000, and whose subscribed and paid-in capital is COP 100 (divided into 10 shares of nominal value COP 10) absorbed a company ("company 2"), also with a single shareholder ("shareholder B"), whose equity was COP 1. 000, and whose subscribed and paid-in capital was COP 100 (divided into 100 shares of nominal value COP 1), and it was agreed that all the resulting shares would be issued with a nominal value of COP 10, that higher nominal value of each share received by "shareholder B" (which initially was COP 1), would correspond to a merger premium.

This does not make sense, nor is it understandable from a legal or financial perspective, for the following reasons: (i) there is no alleged premium since what is given is a summation - line by line - of the balance sheet accounts (including that of the capital), reason for which the nominal value of the shares into which the capital of each of the companies is divided has no importance whatsoever, (ii) if it is recognized that in effect a premium is generated (which is not the case), this would be for "Shareholder B", since it went from having shares with a nominal value of COP 1 to having shares with a nominal value of COP 10.

Now, the real definition of merger premium, or merger-division premium, is found in the international doctrine which, according to Professor Fabio Londoño Gutiérrez ("Fusiones, Escisiónes y Tributación" -Uniandes-) is understood as "the difference between the book value of the assets that are succeeded by the effect of the merger and the amount by which the capital stock of the absorbing company is increased, and similarly, the spin-off premium, referring to the difference between the book value of the assets transferred en bloc as a result of the spin-off and the amount of the capital stock of the beneficiaries (...)". )". That is to say, the merger premium is the greater equity value that occurs on the occasion of the merger, which will be determined in contrast with the sum of the equity, regardless of what happens with the par value of the shares issued as a result of the merger. Such higher value of the equity sum, in relation to the integrated capital, will necessarily result in a higher value of the share received due to the merger, and therefore it may be accounted for in the shareholders' equity as a merger premium.

Another mistake made by the Superintendence of Corporations is to assimilate the merger premium to an effective contribution to the equity of the absorbing entity, as occurs with the premium in the placement of shares.

Hence, it states that such premium may be reduced or reimbursed under the terms of the capital. The merger premium is nothing more than the goodwill acquired in the operation, which will have a merely accounting and not tax effect, since -although at one time it was deductible- its tax amortization was restricted, in merger operations, by Law 1607 of 2012.