Common Pitfalls in Corporate Re-Organisations
Corporate re-organisations or restructurings are undertaken for a variety of reasons. The benefits can be considerable. In some cases, however, difficulties can arise. Such problems can, in the vast majority of cases, be avoided where time allows. Therefore, considering potential issues at an early stage and planning accordingly can prove invaluable.
Common pitfalls include the following:
Secured Assets
It is important to check at the outset whether any assets or undertakings proposed to be transferred as part of a re-organisation are subject to security granted to a financial institution or other lender. Where the finance facilities have been repaid, there may still be security in place which needs to be released. Where facilities are current, the security will need to be reviewed to check whether a release or partial release or bank consent is required.
A company search will identify registerable security. It should also be borne in mind that there may be security in place which is not registerable e.g. charge over shares. Registered charges may also extend beyond what is apparent from an initial review e.g. a charge put in place to secure acquisition finance for a property may extend to other assets.
Regulatory Licences
Where a restructuring involves the transfer of a business, consideration should be given at a very early stage to any steps needed to transfer or set up registrations, licences, authorities or certifications in the new company which is to take over the trade. These enable the company to operate its business and can be fundamental.
In some cases, action may be required even where there is no business transfer. A requirement for new registrations or approvals might be triggered by the mere fact that there are changes in shareholders in a trading entity or its holding company.
Material Contracts
Similarly, consideration needs to be given to whether key contracts with customers and/or suppliers need to be assigned or novated or whether the consent of the other party might be required before proceeding with a re-organisation. A failure to do so could trigger a right to terminate the contract.
Property
A common pitfall in corporate re-organisations is a failure to deal with property aspects of the restructuring at the appropriate time. A business transfer from one group or related company to another will often involve no perceptible change in dealings with other parties, such as landlords. However, from a legal perspective, the occupier of the premises is the company which operates the business at that premises. That occupier will often change as a consequence of a restructuring. This is something that can usually be addressed in a relatively straight forward manner at the time but may prove more problematic if left to a later date.
Companies Acts Restrictions
A number of steps frequently taken in re-organisations will require either (a) additional approval of the shareholders or (b) a summary approval procedure under the Companies Act 2014. In the latter case, a failure to adhere to the requirements is difficult to address retrospectively and may require a court application.
By way of example, a three party share for undertaking exchange involves a company (Company A) transferring its business to another company in common ownership (Company B) in exchange for Company B issuing shares to the shareholders of Company A. This is a common tool used as part of tax planning or in preparing a company for sale. A summary approval procedure is required unless Company A has profits available for distribution in excess of the book value of the assets transferring. It is not unusual for this restriction to be overlooked initially, potentially causing significant headaches at a later point.
Notices to Employees
Where a re-organisation involves the transfer of a business from one entity to another, the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (TUPE) will apply. Employees who are wholly or mainly assigned to the transferring business or undertaking will have an automatic right to transfer employment to the new or reorganised entity on the same terms and conditions of employment with their continuity of service remaining. Under TUPE, a 30 day information and consultation period with the employees is required.
It is a common misconception that TUPE does not apply to a transfer between group companies. There is no such exemption.
Compliance with TUPE should be considered at an early stage given the 30 day notice period and the importance of clear communications to employees.
Finally, it is important to bear in mind that any changes in a planned restructuring may require a re-assessment of matters. It is not unheard of for a situation to arise where all necessary checks are carried out at the outset but, as a consequence of changing or tweaking the plan over time, last minute issues still arise.
This article is for general information purposes. Legal advice must be obtained for individual circumstances. Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies
For further information on these topics, please contact:
Alexandra Moore
Employment
M: +353 86 0671517 | T: +353 1 6766033