Issues to note when a parent absorbs a wholly owned subsidiary by merger

There are a number of methods that a merger and restructuring may take, such as equity transfer, asset transfer, investing in other enterprises through capital increases and mergers and divisions between enterprises. This column will address certain legal issues to keep in mind when a parent company absorbs a wholly owned subsidiary via merger. “Company” in this column refers to a limited liability company.

Parent’s registered capital

It may seem on the surface that a merger between two companies is the start of a relationship between the merger and the mergee. However, it is actually a restructuring of shareholders’ equity. The mergee company shareholders swap their equity for equity in the merger company, all of which is manifested as an increase in the number of merger company shareholders and a change in the company’s registered capital.

The law is silent on how the registered capital of a company post-merger is to be calculated. Further, it is only touched briefly upon only in the legislation at the departmental level.

Zhang Meiying is a partner of East & Concord Partners