Last year marked a continuation of strong M&A volumes, with US$3.15 trillion in global transactions according to data provider, Mergermarket. Strong activity, driven by cheap debt and a low growth environment, has continued into Q1 2018, and large deals are expected to be a fixture of the M&A landscape in the year to come. The buoyant M&A market has led to extensive reorganisation work for both sellers and buyers, particularly for mega-deals that frequently require substantial post-deal integration and non-core divestment work — a trend Latham believes will continue while M&A levels remain high. However, while well-executed reorganisations can help facilitate a smooth M&A process or integration project, they require meticulous and timely planning to ensure a successful outcome.
What constitutes a corporate reorganisation and why reorganise?
A corporate reorganisation typically involves the transfer of assets, whole businesses, or shares between entities forming part of the same corporate group, on a solvent basis. Businesses undertake corporate reorganisations for several reasons, and M&A is currently a large driver.
- On the sell-side, a company considering a sale of part of its business, for example, may reorganise beforehand to facilitate a smooth transaction, particularly if the part of the business to be sold is highly integrated and there is a perceived benefit to putting it on a standalone footing before launching a sale process.
- On the buy-side, acquirers may reorganise to integrate an acquired business, or to prepare for the disposal of non-core assets acquired as part of a larger acquisition.
Challenges to ensuring a successful reorganisation
Early planning and engagement with stakeholders are essential for successful reorganisations as there may be numerous third-party consents, employee consultations, and operational, technical, financial, legal, and taxation issues (amongst others) to consider before a reorganization is undertaken. It is also important to consider the reorganisation’s impact on stakeholder groups and manage communications accordingly to avoid harming customer, supplier, and employee relations as well as preventing the company’s business continuity and financial strength from being compromised. Asset transfers may be subject to security or contractual restrictions on transfer which reorganisation timelines will need to factor in. Transfers of value to shareholders or sister companies may be subject to capital maintenance rules under English law, which should also be worked through when planning a reorganisation.
Beyond business challenges, a reorganisation may have certain regulatory ramifications. If a business authorised by the Financial Conduct Authority (FCA) changes its intermediate holding structure (i.e., if neither the ultimate nor the direct ownerships change), an application must be submitted to and consented to by the FCA before the change can be effected. Failure to obtain the requisite consent can trigger criminal penalties. Separately, if a company has a UK defined benefit pension plan, impact of the reorganisation on the pension scheme will need to be considered as the UK Pensions Regulator has wide powers to intervene if it believes pensions may be placed at risk as a result of a transaction.
Corporates should plan carefully to ensure that proposed reorganisations achieve the desired outcomes. A well-executed and documented reorganisation can help maximise value from a sale process by providing buyers, acquisition funders, and warranty and indemnity insurers with comfort as to potential risks and liabilities.
By contrast, a poorly executed reorganisation can have a seriously detrimental impact and result in tax liabilities, criminal sanctions, or having to agree to indemnities or escrows in transaction documents. Engaging the relevant legal, financial, and tax advisers early, to work alongside the company’s team responsible for designing and implementing a reorganisation, is therefore critical.