Many businesses operate though group structures. This may be the result of carefully thought through strategies or it may arise from legacy acquisitions. Below we look at some of the why, what and how considerations the board of a company / group may have when thinking about an intra-group re-organisation.
Why carry out an intra-group re-organisation?
To increase efficiency and reduce risk
On the one hand, consolidating a group into a single entity, with a divisional structure can:
- reduce the administration of operating multiple entities, including the regulatory and filing burden;
- mitigate costs (such as cross-charging and professional fees); and
- remove the requirement to reveal the profitability of different parts of the business to competitors by preparing a single set of accounts.
Conversely, reorganising a single-entity business into multiple companies can:
- assist with reducing risk. For instance, a new diversified element of the business can be separated from the traditional operational activity. Both can, in turn, also be separated from valuable IP or other assets, which can be warehoused in an investment company; and
- staff working in separate parts of the business can be incentivised through equity (although thought needs to be given to the structure for certain tax efficient schemes to qualify for relief).
To mitigate tax
A re-organisation can secure tax advantages, such as rearranging cashflows in order to minimise tax costs or to reduce the cost of repatriating income to the UK from overseas subsidiaries.
To structure acquisitions
Before an acquisition, a buyer may want to create a new company to acquire a target (in order to achieve one or other of the above benefits).
If a seller wants to retain part of the business operated by their company, they may undertake a pre-sale reorganisation to incorporate the retained division into a separate company.
To deal with post-acquisition issues
If it isn’t possible to create a new company to acquire the target, a post-acquisition reorganisation may be used to ensure that the acquired business sits in the most appropriate parts of the acquiror’s group. This can include hiving down parts of the business into existing operating subsidiaries.
HOW is it done?
Shares, Assets and Demergers
In broad terms, the reorganisation will involve the transfer of shares or assets from one company to another company within the target group (or to a new company incorporated for such purposes).
There are a myriad of possibilities depending on the objective being sought. However, due to the corporate and technical elements of these transactions, there are some well-established methods for various re-organisations.
For example, a segregation of activities so that the end-result is for the new group structure to remain held by some or all the original shareholders is commonly called a demerger. One of the key technical concerns for a demerger is to ensure that the way it is carried out does not create tax charges for which reliefs are otherwise available.
A demerger can be arranged such that the company being demerged is held by the same shareholders (in the same proportions) as before. Alternatively, the shareholders may require that it results not only in a segregation of the original business, but also that the shareholders hold different resulting companies. This is often referred to as a partition demerger.
Depending on the outcome and the means to achieve it, a demerger is either “statutory”, in which case (broadly speaking) it meets the qualifying conditions for certain tax reliefs or “non-statutory (i.e. qualifying conditions are not met, resulting in more complexity in order to achieve tax-efficient results).
WHAT to consider (some tips)
However, the re-organisation is structured, the parties will usually need to consider (amongst other things):
- Contracts with third parties – any material contracts must be reviewed to ensure that there are no unintended consequences of the reorganisation. A transfer of shares may trigger “change of control” clauses and a transfer of assets may require the “novation” of contracts. Both may need the consent of the third parties.
- Employees – with a business / asset transfer, rules will automatically apply to protect employees of the business (known as TUPE), triggering compliance obligations for both the transferee and the transferor.
- Borrowing – banks will need to be contacted if there is borrowing or security in place so that any relevant consents can be agreed
- Approvals – there may be other third parties whose continued approvals are required to enable the business to operate (such as a regulator, government department or sector association). Consent to the transfer may be needed from such third parties.
- Shared assets – if the divisions of one business are to be transferred into separate entities, thought should be given to how shared assets owned by one will be used by another (such as facilities, IT or HR function).
In summary, reorganisations can benefit a variety of business (not just large organisations). Reducing risk, preparing a company / group for sale and making use of tax efficiencies are just some examples. They can also enable a business to incentivise employees of separate business divisions through shares and allow business owners to map the exit journey for businesses with very different trajectories.
Taking detailed tax advice is essential. It is also important to deal with banks, material customers / suppliers and employees in a manner that reduces business disruption and ensures a smooth transition.