During the COVID-19 crisis, various businesses will be looking at how best to reinvent or reorganise themselves. In some cases this will be driven by an immediate need or new ways of working. In other cases businesses may take advantage of day-to-day business being quieter than usual, allowing management a little space to plan for the future and contemplate ways to improve prospects and performance. In particular, it is likely that factors driving any changes in this climate will include the following:
A shift in a group’s strategic focus
Companies may be looking at making changes to their strategic focus, whether in their customer base, product lines or methods of operating. Changes to business operations and corporate structure may be needed to align with any strategic changes.
Focussing on cost savings and efficiencies by making operations more efficient and simplifying corporate structures
Often group structures are too complex for requirements, particularly where those structures have evolved over a number of years or after a number of acquisitions or transactions. Business and assets may be spread out over various group companies and there may also be a number of dormant companies that sit in the group. Rationalising the group structure can save significant costs as the group will not need to maintain, manage and audit as many entities. It can also make the group more attractive for a sale or refinance, if that is being contemplated as an exit or growth strategy.
Preparing for a sale of all or part of a corporate group or business
A group may decide for strategic reasons to divest certain non-core businesses or assets, or to seek a buyer for the whole group. If so, it should consider how to structure the group to enable such business/assets to be sold to a buyer in an efficient way and to maximise returns to the group or its shareholders, for example, extracting any part of the business and assets into a separate entity, carrying out a demerger or getting rid of unnecessary layers of holding companies.
Adjustments to share capital/ownership structure
Companies may be looking at making adjustments to their share capital/ownership structure. For example, companies may be raising further finance which will involve changes to the share capital and impact existing shareholder arrangements.
Preparing the group for a refinance
Any 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.
Integrating recently acquired businesses
If a group has made recent acquisitions it will want to ensure they are integrated into the group successfully, which may involve hiving out the business/assets from the acquired entity to another group entity.
Implementing any such changes involves a corporate organisation of some form. All corporate reorganisation projects are different, but there are some common key legal and practical issues that are worth bearing in mind.
- It is likely that you will need to talk to certain key parties and in certain cases to obtain their consent, or they may have a right to be notified after a reorganisation has happened. For example, lenders may need to consent under the terms of their facility agreements, certain key shareholders/investors may need to consent under the terms of their shareholding/investment arrangements and landlords may need to consent to the assignment of any leases. The group will also need to consider its key customer and supplier relationships in case there are any contractual provisions that may be impacted by the reorganisation, such as change of control provisions (which may require consent or notification), prohibition on assignment without consent and/or any related termination provisions. If your group is regulated, for example by the FCA or Ofsted, then there may be regulatory approvals required. All of this will impact timing and will need to be handled carefully.
- You will need to consider the value attributed to any assets transferred in the reorganisation, to avoid falling foul of unlawful distribution rules and to comply with any tax requirements. In group transactions, assets are commonly transferred at book value, and in that case the company transferring needs to have positive P&L reserves. Transferring assets at less than market value also needs to be considered from an insolvency perspective, particularly in the current circumstances, as such transactions may be challenged if the company transferring the assets subsequently becomes insolvent/goes into administration.
- If you need to remove companies that are dormant/non-trading, it is worth considering whether a strike off or members’ voluntary liquidation is the best course of action. Using the strike off procedure, although cheaper and simpler than going through a members’ voluntary liquidation process, is usually only suitable for companies that have never traded (or not for a long time) and do not hold any material assets.
- You may need to take preliminary steps to clear up balance sheets of some of your group companies. One common example is where companies have a sizeable issued share capital or share premium account, and you may wish to reduce the share capital before the company is liquidated or struck off, in order to return excess cash to the parent company. This must be done carefully in order to comply with the process set out in company legislation, otherwise the transaction may be void. In addition, inter-company balances may be written-off and/or moved around the group and formal novations may be required.
- Where certain types of asset (e.g. real estate, IP and shares in other companies) are being transferred, the correct legal steps will need to be taken to ensure the transfer of ownership is perfected and this may involve getting consents from third parties and/or making filings with external bodies. Stamp duty and stamp duty land tax implications also need to be thought about when transferring shares and real estate between entities.
- If any reorganisation involves transferring employees between companies then it is likely the Transfer of Undertakings (Protection of Employment) Regulations 2006 will apply. This legislation imposes consultation obligations on the relevant companies, including requirements to inform and/or consult the relevant employees and there are penalties if such obligations are not complied with. The legislation also restricts redundancies and changes in employment terms in relation to the transfer so, if redundancies or changes in terms are being considered as part of the reorganisation, this needs to be dealt with very carefully.
- If there is security over any assets being transferred/any company proposing to be eliminated then consent is likely to be required from the lender to such action and appropriate releases will have to be obtained.
- Pensions and other benefits may need to harmonised across the group. If the group operates a defined benefit scheme then the impact of the reorganisation on the scheme will also need to be assessed, and you may need to involve the pension scheme trustees and Pensions Regulator at an early stage to ensure that they are on board with the proposals and that pensioners are appropriately protected.
- It is important to keep an eye on director’s duties generally, particularly where there are numerous transactions going on between group members that have the same directors. At each stage it is necessary to consider the corporate benefit issues for each company in the group. Any decisions made should be recorded in board minutes and there may be shareholder approvals required to the board’s actions either required by law, or under any constitutional documents.
- Shared assets and services issues will need to be dealt with and in some cases it may be appropriate to formally record any terms in a separate transitional services agreement.
- Administrative matters such as company stationery, VAT, payroll, amending invoices, closing bank accounts, group insurance policies will all need to be handled.
- Tax and accounting implications of any corporate reorganisation will need to be considered and any HMRC clearances that may be required need to be factored into any timing.
- If the group has entities or operations in other jurisdictions that are impacted by the reorganisation, local laws and procedures will need to be addressed.
- Finally, do not forget the practicalities of completion. In many reorganisations, there are numerous board members, signatories and stakeholders who all need to sign, approve or review different documents. Do you know who is needed for a quorate board meeting of each company, and who can sign the documents? If the reorganisation will need to complete during social distancing, how will shareholder/board meetings take place? Does everyone have access to printers and scanners at home or will you plan for electronic signature (for example, using DocuSign)? Do your signatories have a witness available if needed? These sorts of questions are often left till the last minute and can cause significant delay and aggravation.
While it may sometimes be tempting to cut corners in the interests of speed or cost, if a group is planning a future sale or refinancing then you should remember that any reorganisation may be subject to due diligence, and it is important to minimise the risk of such transactions being challenged in that process. Equally, or perhaps more importantly, is the possibility of personal liability falling on the directors or shareholders if they carry out any actions that breach insolvency laws, or if they receive a benefit that is clawed back or where the transaction proves to be void or voidable.
As with so much in life, preparation, planning and project management are all critical to ensure a smooth process and that the objectives of the reorganisation are met. Remember: measure twice, cut once!