There are a host of different ways (of varying complexity) to achieve a reorganisation. This article introduces some of the more common reorganisation methods and the considerations for utilising them.
How a reorganisation is structured and implemented will ultimately depend on the individual circumstances, requirements and commercial drivers of the company/group – there is no “one-size fits all” approach.
There are a number of reasons why a company (or corporate group) might seek to undertake a corporate reorganisation. For instance, a reorganisation may take place:
- to secure tax advantages;
- as a preparatory step before a sale (e.g. to “package” and separate the business which is being sold);
- as a preparatory step before an acquisition (e.g. to facilitate borrowing and the provision of security ring-fenced away from other parts of the acquiror’s business and/or to ring-fence the acquired business from the rest of the acquiror’s group);
- to increase business efficiency (e.g. to consolidate resources, operational activities and divisions of what might be a fragmented group or on the other hand to separate poor performing divisions from lucrative divisions);
- to separate distinct businesses (including the ownership of those distinct businesses); or
- to ring-fence business liabilities and protect business assets (e.g. property).
Creation of a group structure
A common commercial driver behind a reorganisation is risk mitigation. Where there is a sole company, a common first step to any reorganisation is to create a group structure to enable assets/divisions/risk to be moved around.
One way to create a group structure is to undertake a “share-for-share exchange” or “share swap” whereby all the shareholders of a sole company transfer their shares to a newly incorporated company in return for new shares in that new company. If this is structured correctly, it can be tax neutral and exempt from stamp duty (specialist tax advice should always be sought). This results in the original company being a wholly-owned subsidiary of the new holding company, paving the way for assets to be transferred out of the original company but within the same ownership structure.
This sort of reorganisation might be attractive to a single trading company which owns freehold property. The property could be transferred to the new holding company (this would be intra-group which has certain advantages) thereby separating the property from the risk of the trading business. If the trading business were to fail then the property should be protected in that it won’t be an asset available to creditors or a liquidator.
Furthermore, this might be advantageous to a single trading company operating a number of different business divisions, one of which carries a higher degree of risk (perhaps because of the industry it operates in). The “low risk” business could be transferred to the new holding company therefore isolating the “high risk” business in a subsidiary. If the “high risk” business fails then it shouldn’t affect the “low risk” business.
Another method to create a group structure is for the single company to incorporate wholly-owned subsidiaries. As an example, if a single company is acquiring a new business it may want to incorporate a subsidiary as the purchaser. Again, this would separate the risk of the acquired business from the acquiror’s main business. In addition, if the purchase is bank funded then this structure would allow security to be put in place over the acquired business rather than the whole of the acquiror’s business.
Put simply, a demerger is the segregation of business activities which are held under joint or common ownership. A demerger may be undertaken to separate two completely distinct businesses (which perhaps operate in different sectors) to enable each business (and the associated personnel) to focus on their respective industry-specific goals and objectives.
Another common reason for undertaking a demerger is to divide a jointly-owned group, perhaps following a shareholder dispute.
While there is no specific statutory procedure for demergers, various demerger structures have evolved over time using general procedures under Company and Insolvency Law. These include:
- A direct dividend demerger or direct demerger – this is where the parent of the subsidiary to be demerged transfers to its shareholder(s) the shares in that subsidiary by way of a distribution/dividend in specie.
- A three-cornered demerger or indirect demerger – this is where the parent transfers the shares in its subsidiary to be demerged by way of a distribution/dividend in specie to a newly incorporated company in consideration for which the new company issues shares to the parent’s shareholders.
- A three-cornered reduction of capital demerger or capital reduction demerger – this is where the parent reduces its capital, satisfied by transferring the subsidiary to be demerged either to the parent’s shareholders or to a newly incorporated company which issues shares to the parent’s shareholders in return.
- A s110 liquidation demerger – this is where a parent company is liquidated and its assets transferred to two or more new companies.
While demergers follow a well-trodden path, there are a number of pitfalls for the unwary. For instance, care should always be taken when using a dividend/distribution in specie to effect a demerger as they rely on sufficient reserves being available and the associated rules on distributions being followed. In addition, directors have to consider their directors’ duties very carefully and the commercial rationale behind any demerger should always be clearly set out.
Transfers of assets
A common way of divesting or consolidating businesses is to simply transfer in or out the business and assets of a particular business activity or division. While this can be more straightforward from a practical perspective, care needs to be taken to identify and sufficiently record the transferring business (together with the assets (and sometimes liabilities) which make up that business). Care is also needed to ensure all the practical steps are considered (for instance, are any regulatory or other consents needed, are there any contracts which may be terminated by the other party on the transfer, are novations of key contracts required etc).
While there are many different ways of undertaking a reorganisation, there are a couple of underlying considerations applicable across the board.
Any reorganisation (however simple) needs careful planning and specialist advice. There is nearly always a mix of specialist legal, tax and accountancy advice required when implementing any reorganisation and it’s important all advisers are briefed at an early stage.
Care must be taken to ensure that any reorganisation does not incur any unexpected tax charges. Again, a tax adviser’s input is always vital but, from a legal perspective, it’s important that the documentation implementing the reorganisation reflects the intended tax planning.
As mentioned, there can be pitfalls for directors and so it’s also important that the documentation clearly sets out the commercial rationale and expected benefits of a reorganisation.
BHW regularly advises on, and implements, corporate reorganisations (including demergers). If you would like to discuss a potential reorganisation further, then please contact Corporate & Commercial Partner, Alex Clifton, on 0116 281 6232 or email firstname.lastname@example.org.