Putting back the pieces differently - The case for restructuring your organisation

During their lifetime all companies, businesses, partnerships and sole traders will have to react to personal, economic or financial change 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.

The most often cited reasons for 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 businesses;
• To extract cash or other assets;
• To prepare the entity for the addition of a new business/company in the group by way of acquisition.
• Tax saving opportunities or problems

In legal terms business restructuring broadly covers three areas:

1. Restructuring the share capital of the company or the partnership equity;
2. Restructuring the directors, management and ownership of the company or partnership; and
3. Transferring assets.

The processes involved in changing the variables in these three areas have different implications and considerations to be borne in mind.

Changes in company share capital and legal structure of an organisation

• Shares 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.

• Share buy-backs

Sometimes, a company may wish to reduce the number of shares in circulation, normally to buy out a retiring director or an existing investor as part of a reorganisation.

• 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. 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 redesignation, reclassification or renaming of shares. Companies may seek to reclassify following a sale or reorganisation and this is governed by the Companies Act 2006 as well as the provisions of the 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. This is often seen when equity finance is raised for a company. It can be a complicated process to follow - there are several legal and procedural issues to consider, particularly in relation to what documents are needed to effect a reclassification, whether the articles of association of the company will need changing, whether class (shareholder) consent is needed and what public filings need to be made.

Restructuring the ownership and management of the organisation

There are several different options 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 (such agreements can regulate key areas of management and avoid costly disputes).
   
• Variations of partnership structure for incoming or retiring partners – in this situation, we can provide admission and retirement documents for these scenarios. We can also review, assess and amend your existing agreements to ensure they properly deal with these issues.
   
• Exit strategies – there are various ways a business owner can leave with a wide variety of financial and taxation opportunities or consequences; sale; family succession, solvent liquidation or listing are all possible options. The most common exit is a sale of a business. It’s worth bearing in mind that the Model Articles (the default 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 related shareholders agreement will help if a business is heading for breakdown:
  • Compulsory transfer: if your shareholder is now working for a competitor or has 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 or nominal value
  • Tag and drag: if a majority shareholder has found a suitable buyer for the company but the  minority are stubbornly refusing to sell, perhaps because they are worried that they may well be left with a majority shareholder 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: a well drafted deadlock clause can provide a mechanism to solve a breakdown in direction or communication, or allow one party to buy out the other where there is little prospect of reconciliation.

Transferring assets and Group formation and asset transfers

The formation of parent and subsidiary companies allow for 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’s 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. Set out below are 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 and tax benefits.

Although a restructuring is generally an internal procedure within a business, it is always advisable for a restructuring to be carried out with the correct documentation in place as it is important that it stands up to 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. Additionally if a group company later becomes insolvent if the restructuring has not been carried out properly then assets transferred away from that group company might be at risk.

We are well equipped to deal with all types of restructures irrespective of value and complexities involved; allowing our clients to minimise costs, enhance value and properly position themselves for the future.  If you have questions regarding restructuring, you can contact Naushad Rahman on 023 8071 7409 or email naushadrahman@warnergoodman.co.uk.

This article has been published as part of the latest issue of our Commercial Brief, detailed within the In Brief section. You can view the other articles within our In Brief below:

• Defendant's failure to assign domain name results is finding of contempt of Court

• "Relational" contract benefits from implied duty of good faith

• How to hire and fire an apprentice

• The scope of lawful act duress clarified by Court of Appeal

• Intellectual Property: everything you need to know

• Bank's relationship manager had no authority to write off borrower debts

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.