Business restructure legal advice
There are numerous reasons for taking action to restructure a business, some positive, some can be negative. Common reasons include :-
- possible insolvency – downturn in business or concerns about business solvency;
- strategic corporate restructure – deciding to ring fence assets or create a different company structure to mitigate risk such as a group company structure;
- tax considerations – you may be able to operate your business more tax efficiently;
- staff restructuring – employment related restructuring where you may decide to make some staff redundant or move to a more flexible business model;
- selling part of your business – a decision to sell only part of the business owned assets and not the entire business; or
- financial restructuring – taking the opportunity to refinance certain borrowings or seek private equity investment.
Whilst lawyers may not be the first professionals that spring to mind when thinking about any of the above types of restructuring, if you do proceed with any option, there will be legal issues considerations, advice and paperwork needed.
We work very closely with other professionals such as accountants and Insolvency Practitioners on many business restructure instructions but an added bonus you get by choosing Gannons is that we are able to give tax advice as well as legal advice.
As a commercial only law firm which advises many small and medium businesses we are experienced in the difficult decisions often involved with a business restructuring. Our services are expert but our fees are highly competitive compared to larger law firms in London.
Choosing the best way to restructure
The approach taken will depend upon the key concerns and desired outcome. Typical concerns will usually revolve around:
Goodwill and branding
Who gets to keep the trading name and goodwill requires a decision as this is an asset which can be very valuable. A further point is trading history – some businesses need a solid history to deal with lenders and suppliers. In other cases the reorganisation is an opportunity to bury an undesired history.
Continuity of business contracts
Existing contracts may be affected by a change of control of the resulting businesses. Consideration is needed as to whether any consents are required and if this could throw up issues.
Assets and liabilities
The cash position of the company will affect the choice of route taken for the reorganisation. Another factor which plays a part is if there are assets such as property or investments as these impact on the tax position of the shareholders following the reorganisation.
Shareholders options on restructuring
There are 3 key ways to restructure a business. The best choice will depend on your circumstances and business objectives. In broad terms most reorganisations follow 1 of 4 routes but there may be variations on the theme to help fit within commercial objectives.
- Statutory demerger;
- Reduction of capital demerger; or
- Liquidation demerger.
This usually involves a creation of one or two new companies (NewCo) underneath the existing parent company. The NewCo shares are then transferred to the individual shareholders in proportion to the value of the respective businesses. Alternatively, new companies independent and distinct are created from a business.
We find statutory de-mergers are a popular choice. A statutory de=merger offers a well established route to achieve many of the desired outcomes. It is possible to create the de-merged businesses free of any immediate tax liability. A big benefit is that HMRC will give advance clearance on the tax neutrality.
Reduction of capital de-merger
Splitting the business can be carried out by reducing the share capital of the existing company. The existing business is transferred to the shareholders or new companies held by the shareholders and the consideration for the transfer is treated as a repayment of share capital. If carried out as a scheme of arrangement, it can be very tax efficient.
Reduction of share capital in a private limited company
A company can reduce its share capital and realise cash by reducing the:
- Number of shares;
- Amount paid up;
- Share premium account; or
- Capital redemption reserve.
Capital reduction generates a reserve which can be either paid out to shareholders e.g. a departing shareholder or retained as a reserve for the company. It cannot be used to pay a shareholder a cash payment which exceeds the amount of the share capital reduction.
Reduction of capital requires shareholder approval and a solvency statement. Reduction of share capital is a popular route for splitting a business.
A liquidation de-merger involves dividing an existing business into separate businesses between existing shareholders and closing down or liquidating the existing company. It is commonly used where the shareholders want to continue running the business but do not share the same vision for the future.
The downside is that the trading history and goodwill of the de-merged company is destroyed. Liquidation is not always straight forward if there are potential liabilities to face. There are also the costs of a liquidator to consider along with whether the company can be legally liquidated.
HMRC have tightened up on the tax benefits available to shareholders upon liquidation. Consequently, we are finding that this route is not as popular as in the past but it still works in some cases.
Implementing a business restructuring
Often before a corporate restructure can happen the company must change its articles of association and get shareholder consents. We look at what needs doing for you.
We review and/or draft the reorganisation documentation and
- Deal with shareholder consents;
- Flag key risks;
- Warranties and indemnities – we help negotiate protections against liability for losses.
Tax on a business restructure process
Reorganisations can be very tax efficient, if carefully structured. Often, tax can be reduced to nil. HMRC will offer clearance before any transaction is implemented to confirm that tax charges will not arise in respect of the reorganisation.
We will secure HMRC clearance for you before implementing the reorganisation.
Tax risks on restructuring a business
If a restructure is not carefully structured the shareholders face risk as explained below. However, if the reorganisation is structured in accordance with the appropriate tax laws many restructures are implemented and neither the the shareholders nor the business face increased tax charges – known as tax neutrality.
- Income tax on shareholders on the value of the reorganised business;
- No corporation tax deduction;
- De-grouping charges on the company;
- Unwanted stamp duty land tax on the properties leaving a group of companies; and
- Loss of group relief.
For experienced, practical advice on restructuring your company or business or for assistance with the documents, legal or tax issues arising, please do get in contact.