Corporate Division

If a company reduces its scale through a corporate division and achieves specialization of each business segment, it can significantly improve efficiency in all respects, including decision-making, operation and management, and financing.

A corporate division can be used to convert a circular shareholding structure into a holding company system.

A holding company structure simplifies the equity-investment relationships and thereby contributes to enhancing the transparency and soundness of the governance structure.

If core business segments and non-core business segments are operated together, a problem may arise in which the value of each individual business segment is not properly reflected in the stock price.

If each business segment is listed as an independent company through a corporate division, it may be assessed more reasonably in the market, and corporate value may rise.

A corporate division can be an effective means of separating and selling a non-core business segment or an underperforming business segment.

Through this, the company can secure the sale proceeds in cash to improve its financial condition and concentrate its management resources on its core business.

Physical division refers to a form in which the parent company comes to own all of the shares of the separated and newly established legal entity.

In this case, the existing shareholders of the divided company do not directly own the new shares of the newly established company or the counterparty company in a merger, and the divided company holds those new shares.

Accordingly, the divided company comes to embody the equity value in the newly established company or the counterparty company in a merger, and as a result the value per share rises, so the existing shareholders can maintain the equity value they held before the division.

In addition, under a physical division the divided company comes to hold the business segment subject to division in the form of a subsidiary, so it can continue to maintain corporate control over that subsidiary.

However, if the purpose of the company division is not simply to increase the number of companies but to enhance the efficiency of each business segment, the effect of a physical division is inevitably limited.

Accordingly, for accounting or tax purposes, a physical division is treated in a manner equivalent to a simple investment in kind.

Personal division is a form in which the shareholders of the surviving company are allotted shares of the newly established legal entity in proportion to the equity they hold.

In the early stage of the division, the shareholder composition of the divided company is identical to that of the surviving company, but as the process of share trading and the like proceeds thereafter, the shareholder composition of the two companies may differ, so the dividing company and the divided company come to form an economically independent structure.

The first procedure to be carried out in order to proceed with a corporate division is the preparation of the division plan.

The division plan must include the following contents.

Together with the division plan, the balance sheet and the like of the company subject to division must be publicly disclosed before the general meeting of shareholders is held, so as to provide sufficient information to shareholders and stakeholders.

This ensures that a transparent procedure can be carried out.

A general meeting of shareholders is held to approve the division plan, and considering that the division is a matter that has an important effect on the existence of the company, a special resolution (approval by at least two-thirds of the shareholders present and at least one-third of the total number of issued shares) must be passed.

Because a division may affect creditors' rights, the company must notify creditors of the division through methods such as a newspaper announcement and provide them with an opportunity to raise objections.

Only after this procedure are creditors' interests protected and the legal stability of the division secured.

In the case of a personal division, the newly established company must hold an inaugural general meeting to appoint directors and auditors and to finalize its articles of incorporation.

In a physical division, however, the inaugural general meeting may be omitted and replaced by board approval.

▷ Compliance With Legal Procedures

When carrying out a corporate division, the company must thoroughly follow the procedures set out in the Commercial Act and related statutes.

A procedural defect can lead to the invalidity of the division or to disputes, so careful review is needed at each stage.

▷ Valuation

Evaluating the value of the business subject to division in an objective and fair manner is important.

This must precede not only the calculation of the division ratio but also the effort to secure the trust of shareholders and stakeholders.

▷ Shareholder Protection

Measures to protect the interests of existing shareholders, including minority shareholders, must be prepared.

In particular, institutional safeguards and explanations are required so that shareholder value is not impaired after the division.

▷ Creditor Protection

Because a division may affect the ability to repay debts, the company must faithfully carry out protective measures under the relevant law, such as the procedure for creditors to raise objections.

This makes it possible to secure the legal stability of the division.

▷ Tax Planning

A corporate division is connected to various tax issues, including corporate tax and acquisition tax.

It is important to review the tax implications closely in advance and to coordinate an appropriate method and timing for the division.

Our firm has many attorneys with an average of more than 10 years of experience, who accurately identify the needs of corporate clients and systematically prepare a response strategy suited to them.

To address tax issues that may arise during a corporate division, our firm also collaborates with related professionals, such as tax attorneys and certified tax accountants, to provide comprehensive advice.

If you are facing a corporate division that requires legal review, you may request prompt and professional assistance from a mergers and acquisitions attorney at Daeryun Law Firm.