In the fourth of their series of articles on corporate reorganisations, Robin Johnson, Christian Mense and Nicola Evans give on overview on the most recent motives and trends for corporate reorganisations.
In an ever changing economic environment, companies are contemplating how to transform their current business set-up to create efficiencies, maximise use of invested capital and simplify corporate structures. While every reorganisation certainly has its own very specific motives and requirements based on the individual organisation’s situation, there are nonetheless certain reoccurring objectives and structuring approaches.
Rationalisation of structures after previous structuring projects
Corporate reorganisations are often driven by individuals, eg by the CFO or the head of tax, the head of corporate development or the general counsel of the respective group. And reorganisations certainly also reflect general policies and approaches within an organisation. However, such policies and approaches can change, in particular where there is a change in management or where there is a change in ownership.
An increasing trend we see is that corporate structures are being revisited and realigned after such an event. There are two distinct realignment initiatives we are seeing in these circumstances. One is to revisit previous structures that had been put in place made by previous management, and the second case is where on a change of control the new owners require their structures and policies to be adopted within the target organisation.
It is often the case that talking to previous advisers who had put in place structures can allow the new management to understand certain nuances and some of the background to previous structures, particularly from a due diligence perspective, in ensuring that there is no leakage or why certain structures were put in place for certain specific issues. Ensuring that the previous advisers work closely with the new advisers to ensure that all issues are addressed is an important step in ensuring the maximum benefit from any implementation of a new corporate structure. Those advisers may well wish for hold harmless letters to be signed.
Pre-closing measures and post-closing integration
As stated above, corporate reorganisations are always on the agenda as part of M&A projects, unless the target has a simple structure. The classic example certainly is the company that has been acquired and now needs to be integrated into the buyer organisation after closing. However, increasingly corporate divisions are not operating on a standalone basis and often benefit from central support structures. So as a result, increasingly complex pre-closing reorganisations are required on the sell-side in order for a relevant business to be sold. Starting this process early enough in any disposal process is vital and often these are left too late in a process and result in conditionality on the transaction when they should have been implemented pre-transaction. Also, in corporate reality, separate business units are not necessarily organised within separate legal entities. If, therefore, one business unit is to be sold, the different business units need to be separated, be it by way of spin-offs, asset deals or share deals prior to closing.
This results in reorganisations not just for the acquiror but also for the sellers. Having sold part of its business, it may well be that the seller’s group structure is no longer appropriate for the continuing business. People often focus on reorganisations on the buy-side but reorganisations post-closing on the sell-side are equally relevant.
As an additional point, this can also be triggered by merger control authorities, which might only allow a transaction to go through under the condition that either the target or the buyer (or both) will sell certain business activities in order to comply with competition law requirements.
IPO and spin-off readiness
Strategic changes, but also shareholder pressure can lead to the decision to spin off a division of a business by way of an IPO. To make the respective business IPO-ready, it needs to be transformed into a separate entity structure and new functions will need to be set up, e.g. head office functions like treasury. As part of the structuring, it might also be necessary to separate holding entities from operating entities.
These are significant transactions in their own right and sometimes there is benefit in having different advisers on the restructuring and different advisers on the IPO/sale as different skillsets are often required. Ensuring that the advisers talk to each other is key but it is often better to have distinct teams working on distinct parts of the project.
A very recent trend has been an increase in cash repatriation projects. One of the intentions of the Trump administration’s tax reforms was to create a tax environment that would make it beneficial for multinationals to move money sitting at the level of their non-US subsidiaries to their US parent company. Before the Trump administration’s tax reforms, US-headquartered multinationals often maintained profits at the level of their non-US subsidiaries due to relatively high US corporate tax rates on repatriated funds in combination with lower rates of taxation locally.
Before the Trump administration’s tax reforms profits were still transferred to the US parent company, but involved relatively complicated foreign tax credit planning through offshore jurisdictions. In light of the transparency concerns and OECD guidance, a number of multinationals are reconsidering their off-shore jurisdiction structures and given the new US tax regime, where there is more flexibility to repatriate without an incremental cost, those historical group structures are being simplified and revisited. Therefore, even though the first wave of cash repatriations has in the meantime been finalised, there are still groups that want to look at cash repatriation programmes in order to streamline their international set-up.
Cash-flow and tax optimisation
It is still an overriding motive for corporate reorganisations to optimise the cash-flow and/or tax position of the whole organisation. This, in most cases, requires changes to the corporate structures in various jurisdictions, but can also relate to new intra-group financing measures or the centralisation of IP within a group of companies. Future-proofing these structures requires detailed documentation to be put in place. Too many times we find there is a lack of documentation for inter-group transactions of this type, which then leads to issues as they are revisited. Treating each inter-group arrangement as a transaction in its own right with proper documentation, approvals and the production of bibles is something we would strongly recommend.
Most favoured jurisdictions
Which jurisdictions play a role in the specific corporate reorganisation of course is most likely to depend on the geographic presence of the respective group. However, there are certainly several countries which play a role in most of the corporate reorganisations of any international group, especially reorganisations which are mainly driven by the goal to optimise the group structure from a financing or tax perspective, but also from a governance and flexibility point of view. These most favoured jurisdictions are:
- the Netherlands;
- the UK;
- the US.
Plus for those groups with off-shore sub-holding structures – Cayman, the Channel Islands, Barbados and Mauritius.
It is always vital for the smooth implementation of the project to have advisers lined up who can service all these jurisdictions.
Top five tips to implement a corporate reorganisation
- A dedicated project management team is key for any corporate reorganisation.
- Planning of macro steps and micro steps needs to start early.
- Technology can massively facilitate the work, eg by using an online document sharing solution.
- Get the teams of advisers (eg tax, legal) lined up early and ensure that they communicate regularly. The good old ‘all hands’ update call still has its magic.
- Get the right resources in place early and have all stakeholders available when needed.