The "negative sum" of capital in the merger

By means of Official Letter 610-002618 of September 29, 2017, the Superintendence of Companies clarified a point that for many years was the subject of doctrinal discussion among those involved in mergers and spin-offs; the decrease of capital in merger processes for reasons other than the reciprocal elimination of participations due to investments of one company in the other.

The matter is a matter of discussion because the Basic Legal Circular of the Superintendence of Corporations establishes that the merger operations in which "the capital of the company resulting from the merger is less than the sum of the capital of the merged companies, except when such decrease corresponds to the elimination of the investment in the proportion in which they participate in the capital" will require prior authorization from such entity.

In other words, the Superintendence of Corporations must evaluate in advance the merger operations in which the linear integration of the capitals produces a lesser amount (i.e., subtracts) from the integration of the same, due to causes other than the reciprocal elimination of participations by investments of one company in another.

The question specifically answered by the Superintendence of Corporations, with respect to this issue, was the following: "except in the case of reciprocal eliminations due to investments of one company in the other, under what other circumstances can the capital of the resulting company be less than the sum of the capital of the participating entities?

In response to this question, the Superintendency of Corporations responded as follows: "In addition to the hypothesis described in the Basic Legal Circular (capital decrease due to the elimination of investments), it is considered possible that the capital of the company resulting from the merger be lower than the sum of the capital of the participating companies when the merger project contemplates the reduction of capital with effective reimbursement to one or more of the partners.

Likewise, this situation could arise when one or several of the partners decide to exercise their right of withdrawal and the other partners do not exercise the purchase option contemplated in Article 15 of Law 222 of 1995, and then the reimbursement of the contributions must be made (...)".

The first alternative, i.e. the reduction of capital for one or several of the partners in the merger project, should not really be taken into account as an act that is an integral part of the merger process but as a legal act parallel to it, which is why this interpretation is not considered acceptable.

That is to say, there are many acts that can be carried out in parallel to the merger act (such as a distribution of dividends, a corporate transformation or the same reduction of capital) but this does not imply that they are -in themselves- part of the merger process. Needless to say that if the above occurs, in light of the provisions of articles 319-4(5)(a) and 319-6(4)(b) of the Tax Statute, the merger (whether acquisitive or organizational) could very likely end up being taxed due to the resulting asymmetry in its shareholding composition.

The second alternative, i.e., the exercise of the right of withdrawal by one or more partners implying an effective reimbursement of the shares or corporate quotas (art. 14 and 16 of Law 222 of 1995) is an act inherent and connatural to the merger process and, when it is carried out, it will of course generate a decrease in the capital of the resulting company with respect to the sum of the capital of the companies that are integrated in the merger process.