Transfer of Business Branch

A Branch of Activity is a set of assets that can constitute an autonomous economic unit that determines economic exploitation, that is, a set capable of functioning by its own means.

The transfer of Business Branches, since the entry into force of Law 3/2009 on Structural Modifications (LME) has been carried out through the operation known as segregation.

Segregation is a type of division whereby a Company transfers one or more economic units or Branches of Activity as a whole by universal succession to one or more Companies (beneficiary/s), with the segregated Company receiving shares or stakes in the beneficiary/s Company/s as consideration.

Apart from the above, there is another legal procedure to achieve the same goal, known as the contribution of an economic unit or Branch of Activity through capital increase, regulated in the Corporate Income Tax Law, which consists of the transfer to another Company of one or more Branches of Activity, in which shares or holdings of the acquiring Company are received as consideration for the contribution.

With the entry into force of the LME and the consideration of segregation as a type of division, a large part of the doctrine considered the division as the only way to make the contribution of economic unit, with certain Commercial Registries not admitting the execution of this type of operation through a capital increase operation.

However, the Resolution of the Directorate General of the Registry and Notary (DGRN) of July 22, 2016, resolved this problem, considering the possibility of making a contribution of a Branch of Activity through a capital increase by non-monetary contribution, without it being mandatory to apply the rules that govern segregation as a type of division.

Consequently, following the aforementioned Resolution, it seems acceptable that the contribution of a Branch of Activity can be carried out through the two figures indicated above, but what is the difference between one operation and the other?

At first glance, both operations appear to have the same objective: the contribution of a Branch of Activity in exchange for receiving shares or equity interests in the beneficiary Company. However, the differences between them are substantial, both in the procedure and in the effects:

• In the case of segregation, the transfer is carried out as a whole in a universal title, that is, the patrimony, which will be made up of the assets, rights and debts that make up said branch, is transferred as a “whole”, it is not necessary to comply with the legal formalities for the transfer of each of the elements.
• It is also important to consider that the segregation is a restructuring operation and, as such, must comply with the procedures established for this purpose by the LME, such as reporting requirements, publicity of the operation, creditors’ right of opposition, etc.
• For its part, in the contribution of an economic unit or Branch of Activity through capital increase, the transfer is carried out individually, so that the common regime applicable to ordinary transfers regulated by the Civil Code will apply, so in this case, it will be necessary to obtain the consent of the creditors and contracting parties to transfer the debts and contractual positions.

Regarding the procedure, it will be the usual one for capital increases, in which the agreement of the General Meeting will be required but it will not be necessary to carry out other procedures typical of the division, such as reports, publicity, right of opposition, etc.

Therefore, while segregation facilitates the reorganization of a Company’s assets or personnel, allowing the effect of universal succession to be achieved, the procedure is more complex than in the case of a capital increase.

Therefore, it is recommended that these types of operations be reviewed and executed by specialists in the field, who analyze each case individually, to determine which operation is most suitable for each situation.