It’s Time for a Change – Restructuring & Reorganisations13th December 2017 11:29 am Comments Off on It’s Time for a Change – Restructuring & Reorganisations
During their life-time all companies, businesses, partnerships and sole traders will have to react to personal, economic, financial and political change (or indeed anticipate it and take proactive action) as certain factors become more salient at any given point in time. Organisations that refuse to change with the times face the risk of becoming obsolete or at the very least miss opportunities.
Restructuring & Reorganisations
Such action/reaction can commonly take the form of a restructuring or reorganisation of operations.
The most often cited reasons for a restructuring are:
- To prepare the organisation for a sale;
- Succession Planning
To improve the management or financial structures of the group/company/business by e.g. hiving off unprofitable or non core business.
- To extract cash or other assets.
- To prepare the group, business/company for the addition of a new business/company in the group (e.g. by way of acquisition). In today’s corporate world, where survival of the fittest is the maxim, mergers and acquisitions are commonplace and any merger or acquisition invariably heralds a restructuring exercise.
- Tax saving opportunities or problems.
In legal terms business restructuring broadly covers three areas:
- Restructuring the share capital of the company or the partnership equity.
- Restructuring the directors, management and ownership of the company or partnership.
- Transferring Assets.
The processes involved in changing the variables in these three areas have different implications and considerations to be borne in mind, which will now be considered:
A. Changes in company share capital and legal structure of an organisation
We can assist in the following areas of share ownership:
Share issues and allotments
Increasing investment by way of new share issues and allotments is often an efficient way to fund new ventures or to reward key employees following, or before a reorganisation. We will take you through the transaction from start to finish, including reviewing your company’s articles of association and setting up tax efficient share options, such as under the Enterprise Management Incentive (EMI) scheme.
Sometimes a company may wish to reduce the number of shares in circulation, normally to buy out a retiring director or an exiting investor as part of a reorganisation. We can guide you through this potential minefield to the completion of your objectives.
Creating preference or redeemable shares
Preference Shares are a special type of stock that have features of both debt and equity securities. They are considered hybrid securities which generally rank for payment above equities but are subordinate to debt instruments. Although they exist as stock, to the holders of preference shares they function in a similar manner to bonds. That is they pay a fixed rate, similar to an interest payment on a bond, at regular points in time. Preference shares can be a useful source of finance for companies in the engineering of a reorganisation.
Transfer and reclassification of shares
The process of converting issued shares from one class into another is called re-designation, re-classification or re-naming of shares. Companies may seek to re-classify shares following a sale or reorganisation and this is governed by the Companies Act 2006 as well as the provisions of a company’s articles of association. This may also be undertaken to allow variations in the distribution of dividends or to give loaded voting rights to certain categories of shareholders often seen when equity finance is raised for a company. It can be a complicated process to follow as there are several legal and procedural issues to consider particularly in relation to what documents are needed to effect a re-classification, whether the articles of association of the company will need changing, whether the re-classification will trigger an alteration to the company’s share capital, whether class (shareholder) consent is needed and what public filings need to be made.
- Group formation (creation of parent or holding company or the creation of subsidiary companies) and assets transfers
The formation of parent and subsidiary companies allow for the hive-up or down of assets in group structures. It makes sense to allocate assets in group companies to minimise tax, risk and administration. It is often the case that companies who have been through periods of change whether by expansion, merger or acquisition, benefit greatly from this kind of restructuring after an acquisition of a company or business. A group may undertake a reorganisation to ensure that the company or assets that it has acquired are amalgamated into the group in the most appropriate and effective way. Set out below are a number of reorganisations which may take place post acquisition:
- The acquired company or its business and assets (e.g. employees) may be hived up, down or across into another existing operating group company;
- Any land owned may be transferred to another group company and leased back to the operating company with risk management or taxation benefits;
- The acquired company’s intellectual property may be transferred to another group company which holds all the Intellectual Property for the group and then licensed back to the other group companies;
- The acquired company may be transferred to an international holding company for additional tax advantages.
B. Restructuring the ownership and management of an organisation
We can assist in the following areas of company management restructuring
Incorporation of sole trader; partnership converting into a limited company; or incorporating a limited liability partnership; employment and consultancy contracts; partnership or shareholders agreements.
Incorporation is an important step in the evolution of many businesses before or after a reorganisation. Our solicitors will expertly guide you through the process and explain the many benefits that come with it and help you to avoid the pitfalls.
Important documents such as employment and consultancy contracts partnership or shareholders agreement can regulate key areas of management and content and avoid costly disputes
Variations of partnership structure for incoming or retiring partners
If you are looking to expand or reduce your partnership we can provide admission and retirement documents for these scenarios. We can also review, assess and amend your existing agreements to make sure they properly deal with these issues.
There are various ways an owner of a business can leave with a variety of financial and taxation opportunities or consequences: Sale, family succession, solvent liquidation investment or listing are all possible options. The most common exit is a sale of the business. It’s worth bearing in mind that The Model Articles – (the default governing document for all newly formed companies) – do not have any provisions about how to leave or force a shareholder to go. Including some of the following clauses into a company’s articles of association or a related shareholders agreement will help if a business is heading for breakdown:
Compulsory transfer: Shareholder now working at a competitor? Shareholder gone on a long sabbatical? Carefully drafted provisions could render these and other actions as a trigger to make a shareholder transfer his shares to the other shareholders. If they are deemed a “bad leaver” their shares may be given a significantly reduced value or nominal value.
Tag and drag: Majority shareholders have found a suitable buyer for the company, but minority stubbornly refusing to sell? Minority worried that they may be left with a majority owner they don’t know, like or trust? Carefully drafted drag and tag rights cover these situations and can ensure that a minority shareholder cannot block a sale or be “left out in the cold”.
Deadlock: Total breakdown in direction or communication? Decisions not being made? Company on the verge of collapse? A well drafted deadlock clause can provide a mechanism to solve these problems or allow one party to buy out the other where there is little prospect of reconciling the parties differences.
Our Company Commercial department will guide you upon all the intricacies and options involved and available.
Other key management reorganization issues which we advise upon are:
- Appointment of directors issues
- Resignation of directors issues
- Directors’ service contracts issues
Although a restructuring is generally an internal procedure within a business , it is always advisable for the restructuring to be carried out on a formal basis and, with the correct documentation in place. It is important that the restructuring stands up to outside scrutiny. A future sale of any part of the restructured organisation might be prejudiced if there is no proper paper trail demonstrating the movement of assets within the organisation. In addition, if a group company later becomes insolvent, if the restructuring has not been carried out properly then assets transferred away from that group company to another part of the group might be at risk.
Whether it is containing costs following an acquisition, or a restructuring exercise following the departure of a senior manager, or the dealing with succession issues for a familyowned business, our Company Commercial Department is well equipped to deal with all types of restructures, irrespective of the value and complexities involved, advising both shareholders and directors of the impact the changes will have. This will allow clients to minimise costs, enhance value and properly position themselves for the future.
This post was written by Colemans Solicitors LLP