News & Events
In these challenging times, our teams have been receiving a high volume of queries from clients on how they can best protect their businesses to safeguard them against the impact of the coronavirus pandemic.
To help our clients, Martin Frost, partner in our corporate team, has explored some of the key issues around corporate reorganisation and restructuring against the background of the coronavirus crisis.
You hear a lot at the moment about businesses undergoing corporate reorganisations or restructuring themselves in the face of these unprecedented economic times. Perhaps it worth starting by clarifying exactly what we mean when talk about a “corporate reorganisation”?
It can cover a whole range a different types of transactions – setting up new holding companies and subsidiaries, moving assets around group companies or merging or demerging companies and businesses, creating new share classes. But essentially it is simply an umbrella term to refer to the process of changing the structure of a company or group of companies to achieve a particular purpose and ensure that the business is set up in the most efficient way to secure the interests of its shareholders and other stakeholders.
So by way of example, perhaps the most straightforward company structure would be to simply have one limited company owned directly by the shareholders with a single class of shares that operates the business or businesses and employs all of the staff. The company holds all of its assets – plant and machinery, real estate, key contracts, investments and intellectual property – and contains all the liabilities – trade creditors, bank debt, tax. In fact the vast majority of companies are likely to be set up in this way and its worth saying that for many companies this will be the best structure for them. We are big believers in keeping things simple wherever possible!
However, it is not uncommon for companies and their shareholders to want to put more complex structure in place and perhaps create some additional companies within the group and hold different assets or parts of the business in different companies.
So when the lawyers and other corporate finance professionals talk about corporate reorganisations they are simply talking about moving from one structure to creating a new one.
Its also worth saying that the term reorganisation – and in particular restructuring – can also relate to certain schemes or arrangement or legal procedures carried out in connection with insolvency or company rescue such as administrations, company voluntary arrangements or administrations. These are of course more prevalent and frequently talked about in the media in the current climate. Our insolvency team are seeing a significant rise in enquiries about such procedures and would be happy to assist if you have concerns relating to these areas. However, for the purposes of today I want to focus on solvent company reorganisations.
So why might a business consider restructuring itself? And are there any particular factors you’ve seen driving corporate reorganisations recently with the onset of the Coronavirus pandemic and lockdown?
As you would expect, there are lots of reasons and of course every business is different and will have its own unique objectives and issues it is seeking to address.
However, some common themes might include:
- Preparing a business or company for sale to a third party or succession (such as to the next generation in a family business or to a management team in an MBO)
- Tax planning/tax efficiencies
- Separating different areas of the business or classes of assets into separate companies to enable greater focus in each area (eg different subsidiaries focused on specific geographical regions/jurisdictions or placing the manufacturing side of the business into a separate company from the distribution and supply side)
- Ring-fencing existing value/assets for certain shareholders before bringing in new shareholders But in the current climate perhaps one of the biggest drivers is “risk management” or “asset protection”. This is where companies/shareholders are seeking to safeguard the existing value and assets that have been built up over a number of years – such as land and buildings, intellectual property or cash reserves – against the risks inherent in trading a business in the current uncertain climate
So how have you and the team been helping clients protect their business and restructure them to best protect existing value?
There are two broad types of transactions we have done an increasing amount of recently: setting up new holding/subsidiary company structures and demerging existing companies/groups into stand alone companies.
- Creation of new holding companies and then transfer key assets (such as real estate, cash/investments and intellectual property) into these new companies. Usually the trading business (e.g. employees, customer and supplier contracts and relationships etc.) will be left to operate in the existing company, which now becomes a wholly owned subsidiary of the new holding company. The ultimate shareholders will remain the same and assets that have been transferred up to the holding company can of course still be used by the trading company (for example the leaseback of a warehouse or office building or license back of intellectual property).
This is a very flexible structure and there are of course lots of variations on this theme. These might include:
- The creation of “sister companies” to hold property or certain other key assets rather than placing all of these assets in the holding company
- Use of a pension fund rather than a holding company to buy the asset for cash – something that could potentially be used to provide much needed liquidity into the business
- Demerging distinct elements of the company’s business/assets into completely separate stand alone companies (i.e. not part of the group).
- This might be done to protect a stable business from a more risky venture or part of the business so that if one suffers difficulties it will not drag down the whole group and destroy shareholder value.
- It might also be done in anticipation of selling off a non-core part of the business to allow greater focus on the main business
- Or it could be in preparation for a merger with a competitor business to achieve economies of scale/consolidate to maximize the chances of survival where you don’t want to merger all of the other parts of the business.
There is clearly a lot to consider and I’m guessing every reorganization will need to be carefully tailored to the needs and objectives of the clients. However, are their any key issues that business owners contemplating a reorganization should focus on. And are there any common pitfalls to avoid?
- What are the tax implications of the reorganization? Are any tax emptions/reliefs going to be available and will it be necessary to apply for any advance tax clearances?
- Will any third party consents required to transfer assets/contracts? (e.g. landlords, HP/leasing companies, customer/supplier contracts etc.). If so, who will approach them? And when?
- Will the reorganization trigger any change of control provisions in any contracts or give any other party an opportunity to exercise any rights against the company (e.g. under share options)?
- Will any bank consents or waivers be required? Will it be necessary to get any releases of assets from bank security or replicate facilities/security in the new company?
- Will any shareholder consents be required (e.g. under the company’s Articles of Association, any Shareholders Agreement or the Companies Act)? Are there any dissenting shareholders and, if so, how are these going to be dealt with?
- Have the implications of any future insolvency event been considered and has the reorganization been “future proofed” and structured correctly to withstand any possible future challenge from an administrator/liquidator? Even on a solvent reorganization the input of our specialist insolvency team can be crucial in ensuring that all of these issues are properly addressed and the documentation correctly structured to reflect, where appropriate, the commercial reasons for the transactions and to show proper consideration given by the directors to any solvency and valuation issues.
Do you have any final tips for those embarking on reorganisations?
- Speak to your lawyers and accountants as early in the process of possible
- Plan early – whilst we can move very quickly given the breadth of expertise across the team, the more time you give yourself the better.
- Consider at the outset whether any tax clearances, banking or other third party consents will be required. These can often represent the “slowest ships in the convoy” so you want to action these early doors so that they can be being progressed whilst other parts of the transaction are pulled together. Don’t leave them as an after thought!
- You need a joined up, holistic approach. A corporate reorganisation can give rise to a host of issues across the business so its vital that you have a good team around you that have the necessary skills and proven experience so that they can anticipate and address these issues in a timely manner. This will potentially include not just the corporate lawyers but also specialists from a range of other legal disciplines including employment, banking, property and commercial contracts. And of course – the elephant in the room – tax! So whenever we advise on a reorganisation we are keen to put a team together from the outset and work closely with the clients accountants and any other tax advisers to deliver a joined up approach.
Our team is on hand to help you, your business and your family however we can, so please get in touch with us on 01482 325242 or email email@example.com
Correct as of 2pm 24.7.2020