In business, merging one company with another has become a common strategy to increase market share and competitiveness. However, for companies involved in litigation, a merger is not only a basic business registration procedure, but also poses potential legal risks in litigation, leading to the possibility of a judgment being set aside. This article provides an overview of the litigation risks associated with mergers and the steps companies should take to avoid them.
Transfer of rights and obligations following a merger
Currently, under Clause 1, Article 201 of the Enterprise Law 2020, “merger” is understood as the act of one or more companies (merging companies) merging with another company (acquiring company) by transferring all assets, rights, obligations, and lawful interests to the acquiring company, while the merged company ceases to exist. Consequently, the acquiring company automatically assumes the legal rights and obligations, including the participation in litigation of the merged company.
In addition, Point c, Clause 2, Article 74 of the Civil Procedure Code 2015 also stipulates that if a party that is an organisation has to cease operations or merge during litigation, the person or organisation that inherits the rights and obligations of that organisation shall take over the litigation. In other words, even if a company ceases to operate after a merger, its participation in civil proceedings can continue through the acquiring company.
Merger risks during litigation
Currently, the law does not provide specific procedural guidelines for companies to follow when merging with another company. However, in practice, changes in legal entities and their rights and obligations during litigation may result in the risk of a judgment being set aside if certain procedures are not followed, as illustrated by the following case[1].
On 18 April 2013, Company T and Company M entered into a cassava chips purchase agreement, No. 07/HĐKT-2013 ("Agreement 07"). Under this Agreement, Company M agreed to sell to Company T 2,649 tons of dried cassava chips for a total price of 12,000,000,000 VND. Company T made a down payment of 1,711,797,925 VND to Company M and was required to pay the remaining balance by April 26, 2013, but failed to do so. Subsequently, on June 15, 2013, the parties agreed that Company T would provide a guarantee for the outstanding debt using its own assets or those of a third party, and that Company T would pay the remaining balance by August 30, 2013 at the latest. However, Company T failed to make the payment by the agreed deadline. As a result, Company M filed a lawsuit demanding that Company T either deliver the aforementioned cassava chips or pay Company M 19,880,000,000 VND (including the purchase price and other penalties and damages).
On July 22, 2020, in the First-Instance Civil Judgment No. 35/2020/KDTM-ST ("First-Instance Judgment"), the People's Court of Q City, Binh Dinh Province, issued a decision: (i) ordering Company T to pay Company M the amount of 12,960,000,000 đồng; (ii) awarding the deposit of 1,711,797,925 VND paid by Company T to Company M; and (iii) obligating Company M to return the collateral documents to Company T.
On August 6, 2020, Company T filed an appeal requesting the appellate court to overturn the First-Instance Judgment on the grounds that the trial court had seriously violated the procedural law by failing to evaluate and collect objective and comprehensive evidence, thereby adversely affecting the company's legitimate rights and interests.
A noteworthy point in this case is that pursuant to Resolution No. 13253/NQ-PVB dated September 26, 2019, the Board of Directors of Bank T approved the merger of Company M into Company P by transferring all assets, rights, obligations, and lawful interests to Company P, and Company M ceased to exist. Pursuant to Point c, Clause 2, Article 74 of the Civil Procedure Code 2015, Company P would be the entity to assume the rights and obligations of Company M in the lawsuit, leading to a change in the plaintiff. However, the trial court did not require Company P to amend and supplement the lawsuit as required by law, and Company M did not perform the aforementioned actions. Therefore, the appellate court found that the trial court had seriously violated the procedural law, affecting the legitimate rights and interests of the parties, and causing difficulties in the execution of the judgment. As a result, the appellate panel annulled the first-instance judgment and remanded the case to the trial court for retrial.[2]
Consequently, in essence, after the completion of the merger, the merged company no longer exists and no longer has the capacity to continue participating in the litigation. Therefore, there must be another entity to represent and succeed to these rights and obligations, otherwise the case will be suspended after a certain period[3]. Moreover, the cessation of existence and the replacement by another entity means that there has been a change in the plaintiff, thereby raising issues regarding the amendment of the statement of claim and other related documents, as the current law requires individuals and organizations to fully and accurately fill in their names, addresses, and other information when filing a lawsuit[4]. Therefore, when there is a change, the enterprise must provide new information, and the competent authority must promptly adjust the documents and procedures.
What should a company do if it is involved in a merge during litigation?
It can be seen that, in addition to the legal procedures, companies involved in mergers must also pay attention to procedural issues during litigation in order to avoid the above-mentioned annulment. One of the most important points is that the company must immediately notify the court and the relevant parties of the merger, including the submission of legal documents evidencing the change in the company's legal form. In addition, the company must also submit a request to the court to change the information of the plaintiff, providing full information about the merged company, clearly stating the reasons for the change and cooperating in carrying out the procedures for changing the information of the parties as prescribed by law and the guidance of the court. If the status of the subject of the lawsuit changes, the court will consider and decide to continue the lawsuit with the party that inherits the rights and obligations of the lawsuit in accordance with Article 74 of the Civil Procedure Code 2015.
In addition, the merged company must ensure the continuity of the litigation process by transferring the rights and obligations of the litigation quickly and without delay. As analysed above, if after a certain period of time there is no other entity to inherit and exercise the rights and obligations of the litigation of the merged company, the litigation may be suspended and dismissed.
In short, the merger of companies involves legal requirements that require companies to be well prepared in order to avoid interruptions in the litigation process or even the annulment of the judgment. Among them, the most important is that enterprises must proactively notify the relevant parties and implement the change of plaintiff's information after the merger. Timely and serious implementation of the above procedures can help companies avoid risks in their long-term litigation process.
Read more at: Để tránh những rủi ro trong quá trình sáp nhập doanh nghiệp
Lawyer Nguyen Van Phuc - Chu Le Quynh Ngan
HM&P Law Firm
[1]https://congbobanan.toaan.gov.vn/3ta900152t1cvn/ z accessed dated 22 October 2024
[2]Article 310 of the Civil Procedure Code 2015 stipulates: The appellate court shall quash the first-instance judgment, quash a part of the first-instance judgment, and remand the case to the trial court for retrial if there is a serious violation of the procedural law that affects the legitimate rights and interests of the parties.
[3]Article 214 and Article 217 of the Civil Procedure Code 2015.
[4]Clause 3, clause 4 of Article 189 of the Civil Procedure Code 2015.
