A merger is a legal operation that allows the transformation of two or more companies by mutual agreement, enabling their partners to form a single legal entity. Thus, a merger by absorption is a legal act perfected through the amendment of the bylaws, resulting in the dissolution of the absorbed company and the transfer of rights and obligations to the absorbing company.
However, there is a broad interpretation of its regulation by legal scholars, generating various classifications. Below, we will discuss the reverse merger.
For the Superintendence of Companies, the reverse merger is "a vertical merger whereby a subsidiary absorbs its parent company, which is dissolved, transferring all of its assets and shareholders or partners to the subsidiary, which succeeds it in all its rights and obligations." (Official Letter 220-133022 of September 16, 2021).
Based on the above definition, it is relevant to note that the reverse or downward vertical merger is not regulated by commercial legislation; however, there is no prohibition preventing partners from creating this legal figure, since its procedure is based on legal analogy with the regulation of merger by absorption.
In this way, the application of the reverse merger results in the transfer of the entire estate, that is, when the subsidiary absorbs the parent company, the latter is extinguished and grants the subsidiary its obligations, real rights, and everything pertaining to its legal unit, granting full disposal power.
Now, it is important to mention that the tax treatment of this legal figure is not subject to a special procedure, since its regulation is determined by the parameters and requirements established for merger by absorption, because no liquidation of the parent company occurs, and consequently all legal elements of its composition are dissolved to be absorbed by the subsidiary. Thus, an integration is created, transferring its obligations to the subsidiary.
On the other hand, and in order to avoid confusion about the reverse merger, it is necessary to indicate the difference between it and cross-ownership, in that cross-ownership is the prohibition of participation in interests, quotas, or shares within a subsidiary or subordinate company of a parent company, since its development reveals a diminution of the parent company's capital, and thus generates duplication of contributions in both companies, creating a fictitious situation, seeking interests other than the reverse merger, where 100% absorption of the parent company occurs.
In conclusion, the reverse merger, from a legal and economic point of view, offers the entrepreneur the possibility of unifying their organization in order to survive in a variable market affected by the various situations that arise day to day. Therefore, through the reverse merger, the main goal is to achieve benefits for market competitiveness and the economic strengthening of companies, through business restructuring or reorganization.
Prepared by: Paula Andrea Florez Florez. Consulting Attorney.