Restructuring your business | What to consider
How appropriate steps are to be implemented needs careful consideration
In the previous article in this series, we outlined examples which would fall within the overall scope of work of restructuring professionals and mentioned common restructuring tools. Before we comment in detail on those areas, it is worthwhile highlighting initial considerations. As with all procedures, it is often the initial planning, the implementation of the foundations and the time spent developing strategy which can prove just as important to a successful transaction as the actual restructuring steps which follow.
Common areas to which the restructuring professional will need to give some consideration will include:
Company law issues
A restructuring practitioner should always start with a review of the relevant corporate entity’s constitutional documents.
As with any corporate transaction, there needs to be a review of the articles of association of each company involved to ensure that the transaction(s) to be implemented are permitted, to check on authorities which may be required, and to consider the appropriate location of power, whether actions can be taken by directors or if shareholder resolutions will be required.
There will need to be a consideration of directors’ conflicts of interest, and a check as to how any conflicts are to be authorised. If appropriate powers are missing, it may be necessary to undertake an initial revision of the existing articles to ensure intended steps can be taken and cannot be questioned following the event.
In addition to the matter of conflicts, directors should also be mindful of their duties under the Companies Act 2006 to ensure that their considerations and actions in progressing the intended Restructure are commercially sound and justified, and do not breach their statutory or common law duties.
Particularly where the restructure may be driven by cost saving factors, or where a corporate rescue is hoped for, the directors should also be mindful of insolvency considerations and possible claims by creditors or shareholders which could arise following the moving of any assets and liabilities around the group.
Third party consents
If any assets or companies are to be transferred, either externally or within a group, the practitioner needs to consider whether any third-party consent may be required. Such consents can often be overlooked and if that were to occur, the entity in question could be exposed to potential claims, contracts may be found to be released or invalid, or the validity of the Restructure itself could be questioned.
Examples of third-party consent include:
- statutory consent from a regulator to a change of control or ownership where the business is regulated;
- from a landlord where there is a transfer of a leasehold property;
- from a financial institution which may hold security over assets intended to be transferred around the group; and
- from a customer or supplier whose contract contains a change of control or ownership provision.
The speed of any restructure, like any other transaction, is dictated by the speed of the slowest element. Where consents may be required, the need to obtain such a consent needs to be identified early and a decision taken as to the appropriate time to seek that consent. There may be areas of commercial sensitivity involved; the notification of the relevant third party when seeking their consent could lead to a sensitive transaction becoming common knowledge.
Contracts and licences
In addition to the obtaining of third-party consents, the restructuring practitioner will need to undertake a review of all important contracts of the entity to be restructured. Specifically, if there is an intention to transfer trading or other activity between members of a group, the question it will be necessary to consider whether consent is required under a principal contract, or whether there is the need for an assignment or a deed of novation of critical contacts.
Certain contracts by their terms may be non-assignable and incapable of transfer or may have a procedure to follow to obtain a consent to transfer.
An entity which has given guarantees or bonds needs to ensure that any proposed action does not trigger the underlying liability or invalidate the guarantee. It may also be an appropriate time to consider whether any such guarantee can be released, and if it cannot to ensure that a suitable replacement or alternative is put in place.
Where a business is being transferred it is important to check whether that business requires any licences or permissions to operate. Where an existing licence or permission is transferable with the business, it is important to ensure that this occurs. Such licences may, however, be personal, and incapable of transfer and hence new licences may need to be obtained to ensure that the business can continue to operate. Any requirements of the relevant regulator for the issue of a new licences or to allow assignment of an existing licence will need to be satisfied. Timings for obtaining these licences should be factored into any timetable for the proposed restructure.
A restructure is often an internal procedure, where the entity or entities involved exercise control over the steps proposed. This often means that less attention is given to the value to be paid than would occur in an arm’s length transaction.
Failure to give appropriate attention to the value to be paid, or indeed the liabilities or reserves to be transferred, can leave the entity in question with possible issues in the future, particularly in the area of taxation or breach of insolvency rules. Care should be taken to ensure that a company does not transfer assets without the requisite reserves (where required) or in breach of insolvency rules which could lead to potential personal liability on the part of the transferor’s directors, or indeed an attempt in the future to unravel the transactions as a result.
Where a business and assets are being transferred, it is important not to forget the provisions of the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE). With TUPE providing that, on a transfer of a business, or part of a business, relevant employees also transfer to the transferee, the movement of assets from one entity to another could trigger a TUPE issue. Hence, consideration should be given to TUPE consequences, the procedural requirements of the legislation and its general effect and impact on the transaction.
Transitional/support arrangements for demerged company
If a company is being entirety de-grouped from an existing structure, care needs to be taken to consider what, if any, existing group support arrangements need to be maintained until (if ever) the demerged company can deal with these issues itself.
Transitional services arrangements at arm’s length pricing may be needed to document the continuation of common support services between the two entities. Common areas where such agreements may be required include finance, IT and HR support services.
In turn, this area may have further knock-on consequences. For example, care will be needed with common use of IT systems, not least in order to ensure that data protection laws are observed. If leased premises are to remain in common use, it is likely that formal landlord consent will be needed as group occupation permission in any existing lease will cease to apply to a former group company.
And most of all, and not to be forgotten, will be the matter of timing.
All steps mentioned above, and many others that may arise during the intended transaction, will impact on the timetable proposed. How appropriate steps are to be implemented needs careful consideration, and an effective plan produced, with scope for slippage, to manage the time within which the Restructure exercise needs to be completed.
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