A group reorganisation typically involves the transfer of one or more subsidiaries, business and / or key assets, within a group of companies, the purpose of which is to reorganise the group’s structure and the way it carries on its business.
A group may choose to carry out a reorganisation for various reasons; however here are the most common:
- Pre / post-acquisition; a reorganisation prior to acquiring a target company can ensure that the company is slotted into a suitable place within the group structure. A reorganisation may also occur post-acquisition. For example, where a target company is acquired, the acquiring group may wish to diversify and hive the company up into separate operating subsidiaries.
- Pre-sale; a company may wish to diversify and sell only one business division. By reorganising, such a division can be incorporated as a separate subsidiary, allowing it to be sold off individually.
- Tax advantages; in many cases, the aim of a reorganisation is to make the group structure more tax efficient, for example by rearranging business cashflow to minimise tax costs. Such advantages should be discussed with your accountant first.
- Business efficiency; you may choose to reorganise into a company that operates in a divisional structure. This has a number of efficiency benefits, including reducing administrative costs such as cross-charging and preparation of subsidiary accounts. Reorganising to a divisional structure may also allow you to ring-fence the business liabilities of a particular division.
Planning is key
Good planning is vital to a successful reorganisation. The first step is to decide upon a structure and what the group is trying to achieve post-reorganisation. This will determine whether the reorganisation will involve the transfer of shares or assets - both of which have their own advantages and disadvantages depending on what the group’s overall aims. It is important that the structure is determined at the outset as it will drive the next steps required to facilitate and complete the reorganisation.
Once a structure is decided, it’s worth preparing a timetable of steps required to complete the reorganisation and a documents list, allowing progress to be monitored throughout the transaction. The timetable should also set out dates on which each step will take place.
In addition, there may be a number of consents and approvals to consider, including:
- Board approvals; the reorganisation should be considered and approved by an authorised board of directors. Directors have a duty to promote the success of the company for the benefit of the members, and must declare their interests in any transaction. Whether or not a director can count towards the quorum for a meeting to approve such a transaction, or vote on any resolution to approve it, depends on the company’s articles of association.
- Shareholder approvals; articles of association and shareholders’ agreements may prevent directors from making significant acquisitions or disposals without shareholder approval. There may be a carve-out within the governing documents for transactions between a holding company and a wholly-owned subsidiary, but it’s important to check the relevant documents.
- Contracts; parties should review key contracts with customers and suppliers. Where these are to transfer to a new subsidiary as part of the reorganisation, contracts will need to be reviewed for any restrictions on assignment, as well as any change of control provisions (e.g. where a holding company is purchasing the shares in a trading company). Some contracts may require approval of the other party before assignment can take place or may have termination provisions which can be invoked on a change of control.
- Lenders; lender consent may be required under the terms of any security documents, e.g. a charge over assets of the group. If consent is not forthcoming, any charged assets must be released from any fixed charge and a certificate of non-crystallisation in regard to any assets subject to a floating charge.
- Taxation; as is the case with any disposal of shares or assets, a number of taxes may arise on transfers made as part of a reorganisation, including stamp duty on the consideration paid for shares, VAT and corporation tax. It is possible to apply for exemption from such taxes, where transfers are made between UK group companies. However, it is vital to discuss this with your accountant, who can assist with structuring the reorganisation in a way that maximises these reliefs.
Documenting the reorganisation
From a corporate governance and legal perspective, it is important that intra-group reorganisations are properly documented, and all forms are transfer are correctly executed by duly authorised signatories.
Whether shares or assets are purchased, the purchase agreement is the main contractual document setting out shares and / or assets to be transferred to the buyer. The purchase agreement for a group reorganisation will generally be much shorter than with an arm’s length transaction with a third party.
Where assets are to be transferred, specific forms of transfer may be required, e.g. assignments or licences of intellectual property rights and assignments or novations of contracts. Where shares are to be transferred, a stock transfer form is required to perfect the legal transfer of the shares.
Ancillary documents will also be required, including board minutes approving the reorganisation, any relevant approvals and loan agreements where consideration is left outstanding as an intra-group loan. Other documents may include services agreements and additional intellectual property licences. The precise documentation will of course vary from reorganisation to reorganisation.
Once all documents are prepared and relevant approvals have been obtained, a number of post-completion steps will need to be taken, including:
- Filing any relevant Companies House forms, for example where there is a change in Persons with Significant Control, or additional shares have been allotted;
- Filing any changes in registered intellectual property with the relevant registry;
- Executing any novations / notices of assignment for relevant customers and suppliers;
- Writing up the statutory books for all group companies involved;
- Applications for tax reliefs; and
- Administrative matters such as the group’s insurance, payroll, pension and HMRC arrangements.
If you would like more information in relation to group reorganisations, please contact Joanne Gallagher, Head of Corporate & Commercial.