Division or separation: how a Lithuanian company can be split

The Civil Code provides two ways of dividing a company. In a division by acquisition (išdalijimas), the rights and obligations of the company being divided pass to other companies that already exist. In a division by formation of new companies (padalijimas), two or more new companies are set up on its basis. In both cases the company being divided comes to an end. For public and private limited companies the law offers one more route, separation (atskyrimas): part of the company becomes a new company, while the company itself remains and continues its activities. If an obligation is not allocated to any company in the terms, all companies operating after the division are jointly and severally liable for it, the liability of each being limited to the amount of equity allocated to it.

What the Civil Code says

Legal entities may be reorganised by merger and by division (Article 2.97(1) of the Civil Code of the Republic of Lithuania (CK)). There are two forms of division: division by acquisition and division by formation of new companies (Article 2.97(5) CK).

• Division by acquisition means that the rights and obligations of the entity being reorganised are distributed among other existing legal entities (Article 2.97(6) CK).
• Division by formation of new companies means that two or more legal entities are set up on the basis of one entity being reorganised, and its rights and obligations pass to them in certain shares (Article 2.97(7) CK).

Only legal entities of the same legal form may take part in a division, save for exceptions set by law (Article 2.98(1) CK). The Law on Companies repeats this for companies (Article 61(3) of the Law on Companies of the Republic of Lithuania (ABĮ)). In addition, a company may be reorganised only when its authorised capital has been fully paid up (Article 61(2) ABĮ).

A small partnership (MB) can also be divided: it may be reorganised by the forms of merger and division set by the Civil Code (Article 27(1) of the Law on Small Partnerships of the Republic of Lithuania (MBĮ)). The Law on Small Partnerships does not provide for a separation of the kind the ABĮ provides.

Division by acquisition: parts go to existing companies

As a general rule, the decision on a reorganisation is taken by the general meeting of shareholders of each company being reorganised and each company taking part in the reorganisation (Article 62(1) ABĮ). Article 65¹ ABĮ makes an exception for a division by acquisition. The general meeting of the company being divided does not need to decide if all companies continuing after the division together hold all of its shares and two conditions are met (Article 65¹(1) ABĮ):

1. the division was announced as required by Article 63(8)–(12) and Article 65(1) ABĮ no later than 30 days before the general meetings of the continuing companies;
2. during the same period every shareholder was given the opportunity to inspect the documents listed in Article 65(2) ABĮ at the company’s registered office.

Even then, Article 63(2)–(5) ABĮ (assessment of the terms), Article 64 ABĮ (report) and Article 65(3)–(6) ABĮ still apply (Article 65¹(1)(2) ABĮ). The decision on the division is then taken by the general meetings of the continuing companies (Article 65¹(2) ABĮ). So the exception applies only where the companies taking over the divided company hold all of its shares.

Division by formation: new companies are set up

A new company is registered after its general meeting has been held, the bodies provided in its articles of association have been elected and the documents required by law have been filed with the register (Article 69(3) ABĮ). Assets, rights and obligations pass to the new companies from their registration, unless the terms of reorganisation provide otherwise (Article 68(1) ABĮ). The reorganisation is complete when all new companies have been registered (Article 69(1) ABĮ). The company being divided ends on its removal from the register (Article 69(5) ABĮ).

Shares of the company being divided are exchanged for shares of the companies operating after the reorganisation (Article 67(1) ABĮ). They may be distributed to the shareholders proportionately or disproportionately (Article 67(2) ABĮ). We covered the share exchange and the right of minority shareholders to have their shares bought out in Company reorganisation: dates, shareholders and the notary.

Separation: the company remains and continues trading

A part of a company that continues its activities may be separated, and one or more new companies of the same legal form may be set up on the basis of the assets, rights and obligations allocated to that part (Article 71(1) ABĮ). The provisions of the Civil Code and the ABĮ on division by formation of new companies apply to a separation mutatis mutandis (Article 71(2) ABĮ).

The Supreme Court of Lithuania has stressed that in a separation the company being reorganised continues its activities after the reorganisation, that is, it does not come to an end. The court also said that this form may be used to separate several activities carried on by a company (ruling of 2020-12-02 in civil case No. e3K-3-325-823/2020, para 35).

When shares are distributed proportionately. If the shares of the new company are distributed to the shareholders in proportion to their holdings in the authorised capital, several requirements do not apply: the auditor’s assessment of the terms (Article 63(2)–(5) ABĮ), the board’s or manager’s report on the reorganisation (Article 64 ABĮ) and some of the disclosure duties (Article 67(3) ABĮ). As the rules on division by formation apply to a separation, this exception should apply to a separation as well. Even without proportionality, the assessment of the terms is not carried out if all shareholders agree (Article 63(5) ABĮ), and in a private limited company the report is prepared only if shareholders holding at least 1/10 of all votes demand it (Article 64(3) ABĮ). What the terms of separation must contain and in what order the procedure runs is covered in Terms of separation: contents, documents and steps.

Can the authorised capital be divided?

The terms of reorganisation state the number of shares of each class and their nominal value for the companies operating after the reorganisation (Article 63(1)(4) ABĮ). So the terms fix the authorised capital of both the new company and the continuing company. The amended articles of association of the continuing company are approved by the same reorganisation decision (Article 62(3) ABĮ). After the separation, the authorised capital of each private limited company (UAB) may not be lower than the minimum set by Article 2(4) ABĮ, and that of a public limited company (AB) not lower than the minimum set by Article 2(3) ABĮ.

The law does not require assets and liabilities to be allocated proportionately. However, if a dispute arises, the court assesses whether the separation was economically logical and made in good faith, or whether its real aim was to escape creditors’ claims (ruling in civil case No. e3K-3-325-823/2020, para 38). In that case the separation moved the company’s assets to the new company and left all obligations with the continuing company, which later went bankrupt. The court accepted that the sole shareholder and manager acted in bad faith within Article 2.50(3) CK, but sent the amount of damages back for re-examination: liability covers only creditors left unpaid because of the bad-faith reorganisation (ruling in civil case No. e3K-3-325-823/2020, paras 40, 43, 46).

Who is liable for obligations after a division

Assets, rights and obligations are allocated to the companies according to the terms of reorganisation (Article 68(1) ABĮ). If an obligation of the company being divided is not allocated to any company in the terms, all companies operating after the reorganisation are jointly and severally liable for it. The liability of each is limited to the amount of equity allocated to it in the terms (Article 68(3) ABĮ). Even an allocated obligation is not fully separated: if the company that received it fails to perform and no additional guarantees were given to creditors who asked for them, the other companies are also jointly and severally liable, again within limits (Article 68(4) ABĮ).

A creditor whose rights arose and had not ended before the public announcement of the terms of reorganisation may demand additional security for performance if there is reason to believe performance will become more difficult (Article 66(1) ABĮ). The demand may be made from the first day of publication of the terms until the general meeting of shareholders (Article 66(2) ABĮ). Why creditors’ consent is not needed is explained in Company reorganisation: is creditor and employee consent needed?.

Article 2.98(2) CK makes the participants of a legal entity that has ceased to exist subsidiarily liable for its obligations for three years in certain cases. This rule applies only to legal entities whose participants are liable for the entity’s obligations. The court has said that it does not apply to limited liability companies (ruling in civil case No. e3K-3-325-823/2020, para 37). However, if the company cannot perform an obligation because of a shareholder’s bad-faith acts, that shareholder is subsidiarily liable with their own assets (Article 2.50(3) CK).

Short comparison

• Division by acquisition: the company being divided ends; its rights and obligations pass to existing companies; when these hold all its shares, the decision may be taken by their general meetings alone.
• Division by formation of new companies: the company being divided ends; two or more new companies are set up on its basis.
• Separation: the company remains and continues trading; one or more new companies are set up on the basis of the separated part; the rules on division by formation apply; it is set out in the ABĮ and so applies to public and private limited companies.
• In all three cases: obligations not allocated to any company fall on all companies operating after the division jointly and severally, each up to its equity.

More on reorganisation

• Reorganisations and separations of companies: service page
• Terms of separation: what they must contain and what goes with them
• Company separation: statutory time limits and what to plan
• Spin-off and share exchange in Lithuania: tax for shareholders

How to start

Send us the company’s articles of association, a recent extract from the Centre of Registers (Registrų centras) and the latest balance sheet. Tell us which activities, assets, contracts and employees you want to separate and who should be the shareholders of each company.

Phone +370 5 212 1506, email info@linden.lt

More about this service: Reorganisations and separations of companies.