Partner Mark Williams looks at some of the key considerations when restructuring or reorganising a company.
The COVID-19 crisis has undoubtedly had a major impact on businesses in the UK with activity slowing or grinding to a halt in many sectors. As a result, many businesses will be looking at how best to reorganise or restructure their current business set-ups to improve performance, create efficiencies, maximise the use of invested capital, simplify corporate structures and adopt new ways of working to ensure sustainable in the short and long term.
There are various reasons why a company may choose to reorganise and much will depend on its focus in terms of customer base or methods of operating. Reorganisations may require the consent of shareholders, lenders, landlords or other third parties. Both legal and financial advice should be sought at the planning stage to ensure these matters are handled with the appropriate care and expertise.
Some of the main reasons why a company might reorganise, and the key matters to be considered, are set out below. At Gaby Hardwicke our specialist lawyers can assist with the legal advice and documents which may be required.
1. Simplifying or Splitting a Group Structure
Expansion may have led to a complex group structure with various trading and non-trading entities. A company may therefore wish to consolidate and simplify a group structure in order to reduce the cost of maintaining, managing and auditing multiple entities. This will ease the administrative burden on key staff so that they have more time to focus on particular areas of the business. It may also make the group more attractive for sale or refinance.
A group may consider removing non-trading companies by strike off or members’ voluntary liquidation. Although cheaper, the former will usually only be suitable for companies that have never traded (or not for a long time) and do not hold any material assets.
Splitting the group may also be an option to protect certain areas of the business by spreading risk and ring-fencing liabilities if there are concerns that a particular division is loss making or exposed to claims or potential liabilities. There may also be greater flexibility in terms of deployment of personnel and other resources. Different divisions of the business can be split through the creation of subsidiaries.
A group may also choose to carry out a demerger whereby a group structure is split into two separate groups in order to remove unnecessary layers of holding companies.
2. Preparing for a sale
A group may decide for strategic reasons to sell one of its business divisions. If that division is not already packaged as a standalone company, a pre-sale reorganisation may be required to incorporate the division as a separate subsidiary.
Even where this has already been done, a pre-sale reorganisation may need to be carried out to deal with issues arising from separation of the subsidiary from the group. This would normally mean ensuring that only those assets which properly belong to that subsidiary are included in the sale, and to agree an appropriate treatment for assets and services which are shared by the business to be sold and the retained businesses. This will help to ensure that the business is sold to a buyer in the most efficient way.
3. Following an Acquisition
A reorganisation may be required following a recent acquisition to ensure that the acquired assets are held in the enlarged group in the most appropriate place. A post-acquisition reorganisation may involve some or all of the following:
- The acquired company or its business being hived down into existing operating subsidiaries.
- Land being transferred to another subsidiary and then leased back to the operating company.
- Intellectual property being transferred to another subsidiary and then licenced back to the operating company.
- The acquired company being transferred to sit under an intermediate holding company.
4. Preparing the Group for a Refinance
Refinancing or putting in place security arrangements may require certain corporate reorganisation changes, for example, changing the group structure, or moving assets around the group to ensure they are caught in the lender’s security net.
5. Adjustments to Share Capital/Ownership Structure
Companies may be looking at making adjustments to their share capital or ownership structure. For example, a company may reduce its share capital to create distributable reserves or to eliminate or reduce losses of the company. It may also repurchase or “buy back” its own shares, which may be the only way a shareholder can realise the capital they originally invested in the company back where there isn’t a market for the shares.
6. Key Considerations
Many intra-group reorganisations take place specifically to secure tax advantages. The aim is generally to make the corporate structure more tax efficient in the long term, for example, by rearranging cash flows to minimise tax costs.
However, a reorganisation could give rise to tax liabilities in respect of stamp duty on the transfer of shares, SDLT on the transfer of any land, VAT, and corporation tax on any income generated. It could also lead to the loss of certain tax reliefs. Therefore, any business that is considering reorganising should seek professional financial advice from the outset to ensure they take advantage of all applicable tax reliefs.
A group reorganisation may also require HMRC clearance and this will need to be factored into the timing.
Where a business transfer occurs, the Transfer of Undertakings (Protection of Employment) Regulation 2006 (TUPE) may apply. TUPE imposes strict procedural obligations on the relevant companies to consult and/or inform the relevant employees. If the TUPE rules are not complied with, the companies may face penalties and/or employment claims from its employees. If TUPE applies, the employees’ jobs and terms and conditions of their contracts will transfer to the new company.
Company Law Issues
The company’s articles of association and shareholders agreement (if applicable) may need to be reviewed and possibly amended as part any reorganisation.
In addition, if any relevant shares or assets are transferred at less than their market value, this may raise issues with the rules relating to director’s duties and interests, insolvency, defrauding creditors, returns of capital and distributions in kind. The consequences of breaching the rules relating to these areas may result in the transaction being set aside in the event of insolvency and/or the directors incurring personal liability. It is therefore important to consider and be aware of these issues at an early stage.
Consents and Licences
It is likely that a business will the need the consent of various third parties in order to carry out a reorganisation. For example, lenders may need to be notified under the terms of their facility agreements, certain shareholders and/or investors may need to consent under the terms of their shareholders/investment agreements and landlords may need to consent to the assignment of any leases.
If the business is regulated, for example by the Financial Conduct Authority, Care Quality Commission or Ofsted, it may need regulatory consent to a reorganisation. All of this will impact timing and will need to be handled carefully.
If part of the business is transferred, the business will need to consider its key customer and supplier relationships in case there are any contractual provisions that may be impacted by the reorganisation. For example, the contracts in place may include change of control clauses, prohibition on assignment without consent and relevant termination provisions. As a result, transferring the contracts may be restricted or the business may need to notify its customers.
The business may also need to consider its intra-group agreements such as IP licences, service agreements and any leases or licences to occupy property.
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