Corporate Reorganisations: A Practical Guide for In-House Counsel

Companies may undertake a corporate reorganisation process for a variety of strategic, financial or other reasons. These may include:

Post-Acquisition

Following a corporate group's acquisition of a company, a post-acquisition reorganisation may be required to ensure that the acquired assets are held within the appropriate operating company and/or to facilitate the efficient integration of the acquired company into the broader corporate group. A post-acquisition reorganisation may therefore involve:

• ‘Hive-up’: transferring a subsidiary’s business and assets to its parent company; and
• Voluntary strike-off of companies: the subsequent dissolution of dormant or redundant companies following a reorganisation, which helps to streamline the overall corporate structure.

Pre-Sale

A group reorganisation may also be used to facilitate the sale of part of the business and commonly involves the incorporation of a particular division as a separate subsidiary, often by way of a ‘hive down’, to be sold to a third party. In such cases, it is especially important for in-house advisors to consider external legal support as the reorganisation documentation may impact the drafting and negotiation of the sale documentation. By way of example, a buyer may insist on contractual protection within the sale documentation in respect of any potential liabilities arising from the pre-sale reorganisation.

Tax Considerations

Companies may also want to consider the potential tax advantages of streamlining the overall group structure. Given the complexity and evolving nature of UK tax legislation, specialist tax advice should be sought to consider the tax implications of a proposed corporate reorganisation.  

Demergers

A reorganisation may also take the form of a demerger, where the reorganisation involves the creation of two (or more) distinct corporate groups. For example, a demerger is often a viable option in cases where the shareholders want to take the company in different directions and ultimately decide to part ways without sacrificing the business in its entirety.

Risk-based and Regulatory motivations

A group may initiate a corporate reorganisation process in order to ringfence liabilities by separating any higher-risk operations from more stable business activities. Equally, there could be regulatory motivations if a group wishes to separate the wider business from the activities of a highly regulated division of the group for greater commercial freedom.

As in-house advisors will be aware, effective planning for corporate reorganisations will involve consideration of the company’s articles of association (Articles) to confirm whether any restrictions apply which could impact the reorganisation.

Where the Articles contain such restrictions, additional shareholder resolutions will be required to disapply provisions within the Articles or to approve elements of the reorganisation.

Due diligence (DD) for corporate reorganisation transactions often differs from arms-length transactions insofar as the focus of DD in the former is on confirming which assets and liabilities are to be transferred, the ownership of such assets, the availability of distributable reserves and ensuring that all requisite consents are obtained.

In practice, this will often include reviewing key commercial contracts, financing arrangements, property documents and licences for anti-assignment, novation or change-of-control provisions, as well as considering whether any pension issues arise, particularly where group entities participate in defined benefit arrangements or other pension schemes that may be affected by the proposed steps.

If it is determined that there are insufficient distributable reserves, private companies may undertake a share capital reduction procedure by passing a special resolution and providing a directors’ solvency statement.

Given the significant consequences of making a solvency statement without reasonable grounds, it is imperative for in-house advisors and external legal teams to coordinate effectively and ensure that the directors have been advised accordingly.

It is also important to note that intra-group reorganisations are not necessarily excluded from the National Security and Investment Act 2021 (NSIA) regime.

In-house advisors may therefore want additional support from external legal resources to consider and address any mandatory notification obligations under the NSIA regime, particularly where the company operates in a ‘sensitive sector’.

Additionally, if a public company is involved within the reorganisation, in-house advisors may also want to seek advice in relation to whether the prohibition on financial assistance applies. Equally, if the company operates in a regulated sector, seeking the requisite regulatory approvals will be essential during the planning and DD phases.

In cases where the proposed reorganisation involves the transfer of business, the company’s obligations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may also need to be considered by in-house teams.

Equally, if there are plans for redundancies following the corporate reorganisation, in-house lawyers may require Employment support specifically in relation to any consultation obligations.

Specialist insolvency advice can also assist in-house counsel in relation to the statutory prohibitions on the strike-off procedure (if applicable) or whether transactions as part of the reorganisation could be subject to challenge by an insolvency practitioner in the event that the company is likely to be unable to pay its debts and becomes insolvent following the reorganisation.