Practical recommendations prior to a merger by absorption process in the Republic of Guatemala

Written by:

Maria Fernanda Morales

 

 

The Commercial Code of Guatemala states in its article 256, the ways through which commercial entities can start a merger process, one of them is the well-known merger by absorption, in which an entity absorbs one or more entities, resulting in the dissolution of the latter.

 

Also, the subsequent articles essentially regulate the registration process that must be carried out in order to achieve the registration of said merger at the General Mercantile Registry of the Republic, a process that is not intended to be fully covered within this entry.

 

Before one or more commercial entities agree on the merger by absorption based in our law, it is important to make the following considerations:

 

  1. Make sure that the entities to be merged have directors with enough powers and legal representation to appear at the necessary registration acts and procedures. In Guatemala, there are still many commercial entities that act through their General Managers or Managers for certain matters, and most of them, do not have the corresponding powers required for this purpose.
  2. Carry out an inventory of the creditors of the entities to be merged, so that, any situation to be clarified with them is foreseen, ideally prior to the merger agreement.
  3. Carry out an assessment of the composition of the capital stock of the entities to be merged. It is necessary to verify that the capital stock within the corporate documents, such as: Articles of Incorporation, amendments, shareholders’ registry and share certificates, coincides with the information contained in the Financial Statements of the entity, especially with the latest Balance Sheet prepared by the entities.
  4. Carry out a due diligence on the equity and capital stock regarding the records of notices given to the General Mercantile Registry of the Republic.

In this regard, I hereby provide the following details:

 

a, Number 8 of Article 338 of the Commercial Code states the obligation to register the issuance of shares and other instruments that entail obligations for commercial companies, stating their series number, value and amount of the issuance, their interests, premiums, amortizations and all the circumstances that guarantee the rights of the holders.

b. For many years, the General Mercantile Registry of the Republic used to register the notices of share issuances in a fairly simple way and without further review in detail of the information filed through the corresponding forms. However, it is very common for these notices to contain errors of form or substance, these substantial errors are a real inconvenience to amend.

c. The aforementioned errors are related to the following: amount of shares paid, nominal value, which many times, by mistake, the amount do not correspond, total amount of the issuance, resulting capital stock, preferential rights, type or class of shares, etc.

d. Errors incurred by the issuing entities of the shares or by the General Mercantile Registry when registering them, become a problem in a merger by absorption process, since there is a mismatch between the notices of issuance of shares and the Balance Sheet of the entity, therefore, the registration of the merger will not proceed until it is amended by the corresponding entities.

e. The method of amending errors regarding the share issuance notices has changed substantially in the last five years or so. Commercial entities that have filed inaccurate information, must appear before a competent judge, by means of a motion of incidental proceedings, requiring the cancellation or rectification of the information, in most of the cases, except those that at the discretion of the Commercial Registrar can be amended by the Commercial Registry itself.

 

  1. After the two-month opposition period that the Commercial Code states for this process, has elapsed, unless it may be omitted due to the approval from all the creditors of the entities to be merged, it is important that the Deed of Merger by Absorption has the appropriate wording regarding the clause on how the post-merger capital will be composed. Frequently, mistakes are made in this phase of the process, due to the lack of clarity in said clause, so it is recommended to review it before singing the Public Deed before a Notary Public.

 

  1. It is important to consider in the Deed of Merger, whether the surviving entity needs to increase its authorized capital stock or whether it will maintain the legal effect resulting from the addition of their capital stocks, which must be clearly stated within the public deed.

 

  1. Regarding the commercial companies owned by the entities to be merged, it is important to determine if they will continue to operate once the absorbed entity loses its corporate legal personality or if there is an interest to be transferred to the surviving entity, this will require a change of ownership which shall be done as a post-merger activity.

 

  1. Regarding the assets of the absorbed entity, it is recommended to carry out a pre-merger mapping to determine which assets will be subject to registry updates once the registry process has ended.

 

  1. Regarding contractual matters, it is recommended that the entities to be merged carry out an exhaustive study on all those contracts that must be modified to show that the surviving entity will be the new owner of the rights or obligations derived from such contracts, since these procedures must be executed post-fusion. Also, it is recommended to carry out the mapping or inventory of the ongoing administrative or judicial cases of the related entities.

This is how the merger by absorption process requires a series of details to be considered, before the shareholders take the merger agreements, through the corresponding means that local law states for this purpose.

 

For more information on merger processes in the Republic of Guatemala, please contact: Maria Fernanda Morales Porres, Senior Associate of the Corporate Law Area: fmorales@consortiumlegal.com

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