Character and composition of business groups

Character of the mercantile groups

Entrepreneurs promote the grouping of companies to optimize or improve the obtaining of benefits from their activity. From the mercantile point of view, Control is the power to direct the financial and operating policies of a company. Absolute commercial control is presumed when more than half of the voting rights are owned directly or indirectly in a Board of Owners: Likewise, there is control if less than half of the voting rights are owned but there is power:

• over more than half of said rights, • to direct financial and operating policies, • to appoint or revoke the members of the administrative bodies and, • to control the majority of votes in meetings

There is significant influence (IAS 28, Art. 7) when you have the power to intervene in financial policy decisions and the operation of the investee company, without having complete control or joint control of it. An investor is presumed to exercise significant influence if he owns, directly or indirectly, 20% or more of the voting power in the investee. The existence of significant influence by the investor is evidenced through one or more of the following routes:

• representation on the Board of Directors, or equivalent management body of the investee, • participation in policy setting processes including decisions on dividends and other distributions, • transactions of relative importance between the investor and the investee, • exchange of management personnel or, • provision of essential technical information

A commercial company is called the parent, holding or controlling company, when it directs or controls economically, financially or administratively another or other subordinate, issuing or controlled companies. That part of the assets and the net results of the subordinated companies that do not belong to the Economic Group and, therefore, that do not have control of the voting rights, are called Non-controlling Participation (or previously, Minority Interests).

The subordinate companies can be of two classes: affiliates or subsidiaries.

Subsidiaries (L.222 / 95, Art. 26): These are companies controlled or directed economically, financially or administratively, directly by the parent company.

Figure N ° 1: Matrix with two Subsidiaries

Figure N ° 2: Subsidiary that is the Parent of another

Susidiary. It is that company that supports any situation of control or majority dependency of the parent company, through the competition of one or more of its subsidiaries.

Subordination (L.222 / 95, Art. 27): The Company that is found in the following cases is considered subordinate:

- when 50% or more of the capital belongs to the parent company directly or through or in concurrence with its subordinates, or with their subsidiaries or subordinates, without computing those shares with a preferential dividend and without voting rights.

- when the aforementioned companies have jointly or separately, the right to cast the votes constituting a minimum decision-making quorum at the Shareholders' meeting or in the Assembly, or in the Board of Directors, if any.

- when the parent, directly or through or with the assistance of the subordinates, by reason of an act or business with its partners, exercise dominant influence on the decisions of the company's administrative bodies.

Link between companies: There is a link between two or more companies when there are common and reciprocal economic, financial or administrative interests between them.

The relationship between economically linked includes:

- entities that are directly or indirectly under common control, are controlled, or one of them controls;

- or that another party exercises significant influence;

- or that they are members of the families of any individual referred to above, or members of the company's key management personnel.

Likewise, it includes:

- the relations between parent and subordinate, - affiliates, - joint ventures,

- business groups under common control or, - groups of individuals who have voting control in such a way that they exercise significant influence.

Figure N ° 3: Concurrence of Parent and Subsidiary

Figure N ° 4: Attendance of Subsidiaries

Two entities that have a common director or key personnel, or if they are financial entities, creditors, suppliers, service companies, government agencies, customers, distribution agents, among others, for the sole fact of doing business, are not considered related parties. with a certain company.

Related party transactions should be disclosed including the nature of such relationships, balances and transactions made, balances or contingent transactions, such as guarantees offered or delivered and provisions or losses recognized in the period for balances between related parties. These disclosures must be made separately for each category of related party.

Joint control: It is the contractual agreement to share control over an economic activity that will only exist when strategic decisions, both financial and operational, related to the activity require the unanimous consent of all the participants.

Business group (L. 222/95, Art. 28): There will be a business group when, in addition to the subordination link between the units, there is a unity of purpose and direction, that is, when the existence and activities of all Group entities pursue the achievement of an objective determined by the parent or controlling company by virtue of the direction it exercises over the whole, without prejudice to the individual development of the corporate purpose or activity of each of them.

Grouping is an external expansion strategy by buying other companies. Companies are subject to restructuring or reorganization to change the corporate structure, corporate objectives and to determine the amount of assets required by their operations. The restructuring of companies can be done by associating with new or existing companies, or by dissolving, liquidating or transforming all or part of it.

When dealing with companies, it is necessary to define the type of group to be used and, in the structure, it will be taken into account if it is a single company or a chain of companies, if the composition of business group or conglomerate is used and if There will or will not be subordination (subsidiaries or subordinates). Among the options, without having to form a company, there are also some of great importance and great use, especially when it comes to large-scale contracts, such as association, consortiums, temporary unions, joint ventures and joint accounts..

The grouping of companies within the same industrial sector, with companies that may have been competitors, is called horizontal integration and its strengthening shows a tendency to form large oligopolies. The gradual grouping of a matrix with its clients or suppliers is called vertical integration and tends to the growth of added value through control of the production chain.

Conglomerate (holding) is called business groups that encompass a variety of companies with different objects, or unrelated sectors that include industries, services, banks, etc... It is a group of investors, both companies from different sectors, and individuals natural, who become owners of various companies and these in turn own different assets, but this group does not have direct investments in industrial, commercial or service activities, although it owns other companies that do have these investments (Parra, 2007). This modality is as a means to control not only vertical integration, but also horizontal integration.

Ways of forming business groups

Business groups are formed through the acquisition of shares and two ways of grouping can be distinguished: merger and transformation.

Fusion

The legal form with which a true concentration of the assets, rights and obligations is achieved is the merger, although also its correlative form of patrimonial disaggregation can be seen through the division in which the assets, liabilities and patrimony are transferred to a beneficiary company.

Merger is the combination of two or more independent companies where the acquirer assumes the assets and liabilities of the acquired companies, which are extinguished, dissolving without liquidating. It occurs when a company can acquire the assets of another, through an exchange of shares, payment of cash, issuance of bonds or exchange of other property. For acquisitions and acquired values, the name of the companies, the method to account for the combination, date in which it occurred, inappropriate companies, the acquisition cost, details about the Mercantile Credit, movement during the period, fair values and any negative Goodwill recognized in results as a result of the combination.

The merger can be classified into:

- Pure merger, when the independent companies that join disappear as legal entities and a new one appears, organized by its buyer, who acquires the rights and obligations of the group and assumes control of the combined companies or businesses.

- Incorporation, when one of the merged companies decides to subsist by absorbing the assets and liabilities of the others. The obligations and rights of the absorbed companies are fully assumed by the absorbing company. The shareholders of the absorbed company or companies receive, by virtue of the incorporation, shares or social rights of the absorbing company.

Excision is the correlate of fusion. According to the Commercial Code, in the spin-off one or more companies transfer all or part of their assets to a beneficiary.

In total cleavage:

- It is called a spin-off by absorption, when a company that dissolves without liquidation, allocates its assets in bulk to the creation of one or more new companies.

- It is called a spin-off by creation, when a company that dissolves without liquidating, transfers its assets in bulk to one or more existing companies.

In the partial spin-off, the spun-off company continues its existence with part of the assets and the beneficiaries may be a single or several companies, both new and existing. According to Article 3 of Law 222 of 1995:

- One or more undissolved companies divides their assets into two or more parts that are used to create new companies

- One or more undissolved companies divides their assets into two or more parts that are transferred to one or more existing companies.

It is possible to carry out a corporate restructuring by applying the combined figures of merger and spin-off. This combination of alternatives is used when multiple purposes of corporate reorganization are intended, or when by virtue of spin-off operations, companies are left without sufficient strength and, therefore, it would be desirable to endow them with the desired equity and asset composition.

In the example shown, it is observed that:

a) company A splits and passes part of the assets to beneficiary company Y, which delivers shares to the shareholders of A, that is, to C.

b) Company B splits and passes part of the assets to beneficiary company Y, which delivers shares to B's shareholders, that is, to X.

c) Company C that received Y shares, by merger absorbs X and, therefore, issues shares that it delivers to the shareholders of X, that is C.

d) in the end companies A (60), B (70), Y (80) and C (290) survive

In the spin-off, when the spin-off company retains part of its assets, there is no dissolution or liquidation. According to Article 9 of Law 222 of 1995 or the Commercial Code, when all the assets are spun off, the spun off company is understood to be liquidated, although such act must be protocolized before the Chamber of Commerce. To the new company created or to the existing absorbent, it undertakes to prepare Consolidated financial statements, in which it must show all its assets, liabilities and equity, integrated to the assets, rights and obligations of the absorbed companies.

As from the formalization of the merger or the spin-off, the absorbing company or the beneficiary acquires the assets and rights of the absorbed companies and the privileges inherent to the transferred part of the equity and assumes the transferred obligations, which may refer to the internal liability or externally (Parra, 2007). The beneficiary company must deliver shares or social rights to the shareholders or partners of the spun-off companies, in accordance with the terms of trade.

Transformation

The transformation consists of a structural reorganization of the assets of companies under common control (consolidation). In transformation, all companies survive. The company from whose shares the majority of the shares were acquired continues its legal and operational life, there is no continuity solution, as it is simply a reform of the bylaws. Fiscally, the regime that corresponds to its nature is applied on the last day of the taxable year. Usually there is no income, since there is no sale, only in the event that a corporation decides to decree an extraordinary dividend by liquidation. If the purchasing company has acquired more than 50% of the shares of the purchased, a parent-subordinate control relationship is established.

Exercise. With effect as of December 31, 20XX, Yira Falcón SA had issued 105 ordinary shares to deliver 102 in exchange for all the assets and obligations of Bebés SA and 3 to Párvulos SA who after which would distribute them among their shareholders as liquidation of their interests and the companies would dissolve. The ratio of the exchange of ordinary shares was negotiated at 1: 1 and that for both Babies and Parvulos, at the current valuation, the fair value of their ordinary shares would be $ 45,000 / share. Suppose that none of the three companies list their shares on the Stock Market, therefore, the accounting will be done at the cost method. Below the balance sheets as of December 31, 20XX..