Company Demerger as a Status Change and a Method of Business Reorganization

As a business grows, the original structure of a company (hereinafter: company; corporation) often stops corresponding to the actual needs of the business. Business activities expand, new products, investors, and successors appear, and sometimes conflicts among shareholders intensify.

Companies may decide to undertake status changes for many reasons: separation of profit centers, attracting investors, sale of one part of the business, reduction of risk, or tax and operational reorganization.

In this text, we explain what company demerger as a status change entails, in which situations it is most commonly used, and what companies must pay attention to before initiating this process.

What does company demerger as a status change mean?

According to the Serbian Law on Companies, company demerger represents a status change in which one company transfers its assets and liabilities to one or more other companies.

There are several models of company demerger:

• division through the establishment of new companies – the existing company transfers its assets to two or more newly established companies and ceases to exist
• division through merger by acquisition – the assets of the transferor company are transferred to two or more existing companies and the transferor company ceases to exist
• mixed division – a combination of the previous two models (the assets of the transferor company are transferred to one or more newly established companies and one or more existing companies)

Companies may also reorganize through the status change known as separation, where a part of the assets is transferred to a new company while the original company continues to exist. This model is often used when a company wants to separate a particular business segment without completely dissolving the existing legal entity.

When companies decide to divide a company

A company demerger is most often part of a broader business strategy.

Separation of Different Business Units

Over time, many companies develop several different business activities that no longer make sense within a single legal entity.

For example, an IT company may develop SaaS products, outsourcing services, and a consulting segment. Each of these parts has different costs, employees, and business strategies.

By dividing the company, owners gain clearer control over each segment and can more easily measure profitability.

Entry of Investors

Investors often do not want to invest in a company that has multiple unrelated activities.

If a company simultaneously owns real estate, develops a product, and provides operational services, an investor may insist that a certain part of the business first be separated. In this way, investors have a clearer picture of what they are investing in, while founders retain the rest of the business.

Sale of One Part of the Business

Sometimes a company wants to sell only one business segment.

For example, a family-owned company may wish to sell its distribution business while retaining production. Prior divide then enables that business segment to become an independent entity that is easier to sell.

Limitation of Business Risk

Certain business activities carry greater risks than others.

This may include, for example, development of a new product, international operations, activities with higher regulatory risks, or activities involving greater liability toward third parties.

Companies often want to protect valuable assets by separating them from riskier operational activities.

Succession Planning in Family-Owned Companies

In family-owned businesses, company demerger may be part of long-term planning.

One successor may want to manage production, another retail operations, while a third may not be interested in operational management at all.

Company demerger as a status change can sometimes help prevent future conflicts through careful allocation of business segments.

Conflicts Among Company Members

Conflicts among partners or shareholders are common in practice and often trigger company demerger.

When members can no longer agree on business development, investments, or profit distribution, division of the company may sometimes represent a more efficient solution than lengthy court proceedings.

What does the company demerger procedure look like?

The practical company demerger includes several activities:

• preparation of a division plan
• adoption of resolutions by company members
• valuation of assets and liabilities
• protection of creditors
• publication of required documents
• registration of the status change with the Serbian Business Registers Agency (APR)

Depending on the industry, additional regulatory or tax-related steps may also exist.

The formal division procedure is carried out in two stages:

1) Publication of the Draft Division Plan

The company publishes the draft division plan on its website, if it has one, and submits it to the Serbian Business Registers Agency for publication on its website no later than 60 days before the shareholders’ meeting at which the decision on the status change is adopted.

Together with the draft, the company also publishes a notice informing shareholders of the time and place where they may inspect the relevant documents and acts, unless such notice has been individually delivered to each shareholder.

Publication of the draft division plan is deemed to constitute notification to the company’s creditors regarding the status change.

2) Registration of the Status Change

After adoption and entry into force of the division plan, registration of the status change is carried out in accordance with the law governing registration procedures. Registration of the status change cannot be completed before dissenting shareholders of the company participating in the status change are paid out.

Since the transferor company ceases to exist upon division, its deletion from the register is performed without liquidation proceedings.

On the other hand, one or more transferee companies are registered through the filing of a unified registration application.

Any increase or decrease of share capital resulting from the status change is registered in accordance with the registration law.

How members divide the company

The division plan is the central document of this status change and contains the model according to which members divide the company, i.e. the ownership interests in the transferor company. The division plan must also contain:

• the ratio of ownership interests in the transferee companies
• any monetary compensation between members
• the date from which such ownership interests produce legal effects

The law does not require all members of the transferor company to become members of the new companies; however, any type of company demerger requires the consent of every member (decisions cannot be adopted by majority vote, but exclusively unanimously).

Depending on the model provided in the division plan, the future ownership structure may look as follows:

Example 1 – Proportional division (most common model)

In the transferor LLC, the ownership structure is: Marko 60% – Jovana 40%.

The company is divided into two new companies. If the division plan provides that members retain the same proportions:

New company A: Marko 60% – Jovana 40%
New company B: Marko 60% – Jovana 40%

Example 2 – Functional division

If one partner takes over one business segment and the other partner takes over another:

Original company: Marko 50% – Jovana 50%

After company demerger:

Company A (e.g. SaaS) – Marko 100%
Company B (outsourcing) – Jovana 100%

This is a common scenario when company demerger occurs due to partner disputes or within family-owned businesses.

Example 3 – Disproportionate allocation with compensation

If one member receives the more profitable business segment, monetary compensation to the other member may be provided.

Legal consequences of the status change

The consequences of company demerger arise at the moment of registration of the status change.

Since the transferor company ceases to exist, all assets, rights, and liabilities of the transferor company are transferred in full to the newly established companies or transferee companies. The transferee companies become legal successors of the transferred asset units, which means they are liable for the obligations transferred to them up to the value of the assets transferred.

Operational consequences of company demerger – employees, contracts, and assets of the divided company

During company demerger, practical relationships within the future companies must be clearly defined:

• which assets are transferred to which company
• what happens to active contracts
• whether consent of banks or business partners is required
• which employees transfer to the new company
• how debts and liabilities are allocated
• what happens to licenses, software, and intellectual property

This is precisely where companies often make mistakes because they focus only on registration of the status change while neglecting its operational consequences.

Protection of Creditors

The Serbian Law on Companies allows creditors of the transferor company to request security for their claims due to the status change.

In practice, the issue of so-called simulated company demerger has also arisen, where companies carry out a division with the intention of defrauding creditors. Namely, when a newly established company receives more liabilities than rights, it is overindebted from the very beginning, which leads it into bankruptcy.

If it is proven that this was done specifically to defraud creditors, court practice has introduced joint and several liability among the transferee companies created through the company demerger of the original transferor company.

FAQ – Frequently asked questions about company demerger

Is consent of all company members required for company demerger?

In limited liability companies – yes.

Does the original company cease to exist?

In the status change of company demerger, the original company ceases to exist.

Are debts transferred to the new company?

Liabilities are transferred to the new companies in accordance with the division plan.

How long does the division procedure take?

The duration of the procedure depends on the complexity of the assets, contracts, and relations among partners.

Is it necessary to hire a lawyer for company demerger?

A company demerger is a complex process for which engaging a lawyer is entirely justified, especially where valuable assets, employees, and active contracts exist.

What if company members cannot agree on the company demerger?

If members cannot agree on the division model, possible options include:

• court proceedings
• sale of the business to a third party
• liquidation of the company
• in extreme cases, compulsory liquidation

Common mistakes during company demerger

When companies underestimate the complexity of this process, the most common mistakes include:

• poor valuation of assets
• ignoring tax consequences
• unresolved contractual relationships
• unclear allocation of debts
• involving legal and tax advisors too late

Mistakes made at this stage may later cause serious disputes and financial consequences.

Conclusion

A company demerger is not a sign that the company is performing poorly. Very often, it represents a natural step in the development of a business that has outgrown its original structure.

When properly planned, this status change can simplify operations, attract investors, and reduce business risks in the long term.

Law Firm Petrović Mojsić & Partners