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Downstream mergers and financial assistance

A merger between a parent company and its wholly owned subsidiary, where all shares and assets of the parent company are transferred to the subsidiary (downstream merger) is expressly permitted under Sec 224 of the Austrian Joint-Stock Companies Act to the extent that share capital is not distributed to the shareholders. The problem of prohibited financial assistance particularly arises, where a loss-making parent company is merged with a profit making subsidiary, eg for tax reasons to offset losses against profits between the merging companies.

In a recent decision, the Austrian Supreme Court (OGH) held that a downstream merger amounts to prohibited financial assistance, where the parent's liabilities exceed its assets. According to the OGH, when determining the parent's assets, the book value of its interest in the subsidiary is to be excluded.

Losses of the parent, ie the negative balance between the parent company's assets and liabilities, may only be transferred by way of a downstream merger:

  • after the subsidiary has effected an ordinary capital decrease or an ordinary capital increase, in both cases at least equal to the losses to be transferred from the parent to the subsidiary; or
  • the merging companies can show to the satisfaction of the competent court that the creditors of the parent have been paid or otherwise given security for their claims.

The OGH also applied the provisions of the Limited Liabilities Companies Act for an ordinary capital decrease to joint stock companies, where the share capital of the subsidiary is less than the share capital of the parent, effectively leading to a capital reduction of the parent. In such a case — in the absence of an ordinary capital decrease of the parent prior to the merger — the assets of the parent have to be shown as appropriated surplus in the opening balance sheet of the subsidiary, otherwise the merger would constitute prohibited financial assistance and would not be registered in the companies register by the competent court.

Peter Huber and Marcel L Aschenbrenner

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