Corporate re-organisations – why and how?
There are many reasons why a corporate group may wish to undertake a reorganisation. In this note we discuss some of the most common reasons, and procedures, for group re-organisations.
However, please note that all re-organisations will depend on the specific structure and requirements of the group, and will involve legal, tax and accounting issues, so professional advice is required. If you are interested in undertaking a corporate group re-organisation, Geldards’ corporate and tax teams would be delighted to assist.
A group may decide to move certain assets or trade from one group company to another group company to protect those assets from liabilities or risks associated with the transferring company. This may be particularly relevant where the group has acquired a company from a third party and wishes to transfer the assets to a new “clean” company.
To prepare the corporate group, or part of the group, for sale
Pre-sale re-organisations can involve removing businesses or companies from the group which the purchaser does not require, or which have legacy issues. It also allows the group to tie up any loose ends which may otherwise be an issue during the sale process (e.g. ensuring the target companies have the correct assets, contracts, employees, etc). This can result in significant savings of time and cost during the sale process.
To simplify the structure of the corporate group
A corporate group may have developed an overly large or complex group structure over time. A re-organisation provides the opportunity to remove dormant companies and/or to combine the trade and assets of certain businesses under one company for operational efficiencies. Such steps can reduce the administrative burden and costs associated with the group and help to simplify reporting and other management processes.
Process for undertaking a re-organisation
Re-organisations can be undertaken in a number of different ways. Firstly, it should be decided if a company’s share capital is to be transferred (resulting in the transfer of the company’s liabilities as well), or if only the trade and assets of the company are to be transferred (meaning specific assets can be chosen and liabilities remain with the transferring company unless otherwise agreed).
Share transfers are usually more straightforward than asset transfers, as asset transfers can involve obtaining contractual or other consents, additional registrations and consultation with transferring employees. These additional steps would need to be considered from both a timing and process perspective.
Secondly, the price at which shares or assets are transferred will also need to be considered. Transfers usually take place at the values shown in the company’s accounts (book value), but it will be necessary for the company to have sufficient distributable reserves. In certain circumstances, it will be necessary for transfers to take place at market value. Often the purchase price will be left outstanding on inter-company loan account and subsequently cleared (either satisfied or waived). Advice should be taken on the appropriate transfer value and any subsequent steps required to deal with any inter-company loans.
Re-organisations can also involve specific processes such as: demergers (the separation of businesses held under common or related ownership); distributions in kind (dividends of specific assets); capital contributions (such as cash payments from parent to subsidiary or the waiver of debts); reductions in capital (whereby a company reduces its share capital and creates a distributable reserve) and company liquidations or strike offs. An explanation of the steps and issues involved in such processes is outside the scope of this summary note, but they can form a useful part of a group re-organisation.
Tax advice should be taken in connection with any disposal of shares or assets, and re-organisations in particular can give rise to a number of different tax issues (such as stamp duty, stamp duty land tax, VAT, corporation tax, etc). Reliefs from these taxes may be available but it is important that the re-organisation is structured correctly. In certain circumstances it may be necessary to obtain clearance from HMRC in advance of the re-organisation.
As can be seen there a variety of ways in which a re-organisation can be undertaken. But regardless of the specific companies or issues involved, there are important legal, tax and accounting issues to consider and careful planning is vital. Whilst re-organisations can deliver significant benefits, there are potential pitfalls and specialist advice is required to avoid those pitfalls and to ensure the re-organisation is properly documented and executed.