Business restructuring

Business restructuring can mean a host of different things, including downsizing the workforce, mergers, acquisitions, debt for equity swaps, and corporate simplification. Businesses restructure for various reasons, whether it is to steer themselves out of trouble, realise value from their assets, make their organisation more efficient or reduce their potential liability.

Restructuring has extensive tax and legal ramifications, which a business expert is best placed to explain. The following is a basic overview of some of the options.

One reason for restructuring is to simplify the business and make it more efficient. The business may, for example, have engaged in a series of mergers and acquisitions and become complex and unwieldy as a result. Simplification may make it easier to manage the company.

As a business grows, it may want to restructure its departments or geographical structure. It may, for example, wish to create new departments or merge existing ones. It may want to focus its business in one geographical area and close regional offices. It is important that lines of staff accountability remain clear, and that relevant training and communication is offered to staff.

A business may decide to streamline its organisation by shedding staff. When making staff redundant, it will have to follow legal procedures to consult with staff and arrange redundancy packages.

Where a business is in trouble, one option may be a ‘debt-for-equity swap’. This is where a business agrees to cancel some of its debt in exchange for equity, and may occur where creditors feel there is greater advantage in taking control of the business as a going concern than forcing it into insolvency.

Types of business structure

If you are changing the legal structure of your business, you will have to comply with the required legal obligations. For example, if you are setting up a company, limited partnership or limited liability partnership, then you will need to register at Companies House (www.companieshouse.gov.uk/). If your business is already one of these structures, and you are restructuring in some way, then you will need to inform Companies House of the changes.

Companies and LLPs must display their full name outside their office, their registration details on their stationary and external emails, and their location, registration details and VAT number on their website.

Revenue and Customs should be informed of any change. Sole traders must inform HMRC for national insurance reasons, and companies will have to pay corporation tax on profits. Where assets are transferred from one legal entity to another, capital gains tax and stamp duty may be payable.

Leases and other contracts may require the consent of the third party before they can be transferred. There may be other legal implications, depending on the nature of the contract.

Restructuring may affect the terms of loans from banks and other lenders. The banks may require additional guarantees or ask you to open a new type of bank account.

Business structures: advantages and disadvantages

Businesses can take many forms. The simplest is that of a sole trader. The sole trader receives all the profits but is also solely responsible for any liabilities.

Partnerships are also simple to set up, but partners may fall out, and they are personally responsible for any debts and liabilities that the business runs up.

Limited liability partnerships are more complicated to set up. However, like partnerships, they are flexible structures and there is an added advantage for partners in that their liability is limited.

In limited liability companies, each person’s financial risk is limited according to their input into the business. Public records and accounts must be kept.

Franchises have the advantage of the support of the overall business, but franchise holders will be limited by the terms of their franchise agreement, and will usually pay a share of their turnover to the franchiser.

Social enterprises are businesses that trade for a social purpose. An increasing number of these are being set up in the UK.

Mergers and Acquisitions

Directors must undertake due diligence—the process of uncovering all liabilities associated with the change—before completing a merger or acquisition. They should always use a lawyer to carry this out.

They must, for example, have proof that the target company owns its assets, and obtain details of any legal cases that have been brought, are pending, or are current. They should examine in detail the target company’s contractual obligations to employees, customers and suppliers, and consider how these contractual obligations will be altered by the merger or acquisition.

They may want to seek an indemnity from the target company to reimburse them in certain circumstances. For example, the indemnity may relate to the company’s tax obligations. They may also warranties on key aspects of the business, for example, its assets or creditors.

Other Legal issues

If you have 50 or more employees, and you wish to restructure, you may have to take account of the Information and Consultation of Employees Regulations. Under these regulations, employees can request that the employer draw up an agreement to inform and consult them about major issues affecting the business, such as restructuring.

Where an acquisition takes place, employers may have a duty under TUPE (Transfer of Undertakings (Protection of Employees) Regulations) to inform and consult with employees affected by the change. Failure to do this could lead to the employer having to pay compensation.

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