Liz Pinnock | Head: Group Legal | RSM South Africa | mail me |
In the world of modern business, it is natural that some organisations reach a point where they are forced to make hard decisions in order to keep the lights on.
Whether it is due to debt, mismanagement, fraud, malpractice, or simply a failure to adapt to changing market trends, sometimes a business faces a crisis from which it cannot come back – at least, not without a little help. That is where corporate restructuring comes in.
The process of restructuring involves bringing in objective professionals who have experience in helping distressed businesses make the transition from crisis to long-term survival. Although, this idea is not new, the current economic climate has definitely made it a much more common occurrence.
COVID-19 has thrust us into a world where businesses that were perfectly healthy and even thriving just weeks ago are being forced to take drastic action to simply survive.
Opening the door to a new way forward
For many companies, COVID-19 has stretched cash flow to its absolute limit. More alarmingly, distressed businesses may have to face the harsh reality that restructuring may be the only option left available to them.
However, restructuring is not always a crisis option.
There are two types of companies that are in a position to restructure. In some cases, the business is operationally sound, but is experiencing pressures to save costs, streamline operational efficiencies, and optimise the business or you have what we’re seeing a lot of right now, which is a business that is financially distressed, and must either sell parts of the business, reduce staff, and reduce expenses to survive.
Either way, it is important to look at the value that restructuring can bring, outside of the usual colloquial business jargon. On paper, restructuring can create a new way forward, a lifeline if you will, for businesses experiencing financial pressures. But there is a far greater impact. For businesses that are financially distressed, restructuring can offer a second chance.
The process begins
Corporate restructuring is complex and requires deep analytics of number of different aspects of the business, including robust financial data, economics, and tax and legal implications. In practice, if a business is looking to go through a restructuring process, the first thing they will be asked to do is to prepare and provide access to financial data.
Once that has been established, a restructuring adviser will typically:
- Conduct a thorough examination of the organisation’s consolidated financial statements
- Gain an understanding of the business’ group shareholding structure
- Analyse funding between the companies (intragroup)
- Determine if there’s an opportunity to apply corporate restructure rules under various tax legislations
The end game is to restructure the company on a tax neutral basis. If achieving tax neutral status is not in the cards, then the restructure becomes much more complex.
Once an adviser gains an understanding of where a company currently is, how do they help them get to where they want to go?
Firstly, there are two questions that must be answered – what do the balance sheets look like now, and what do we want them to look like? The answers to these questions will inform the adviser as to what kind of transaction the business should pursue. Is it a merger of entities? Some form of share transaction?
Once the desired result is agreed upon, then the adviser can guide the business through the process of implementing a legal framework.
Next steps
More often than not, an adviser will draft a position paper for the board. This paper will articulate the purpose of the restructure and how it will be achieved, including timelines, deliverables, and a cost/benefit ratio. This usually ends up being a substantial document for the board, designed to help them apply their minds, and it is best practice to provide two or three options.
In some instances, advisers may suggest triggering tax relief, whereas other times a business may not be in a position to do so. Often, advisers have mapped out the various options for a business, and from a legal perspective there may be a suite of agreements that support them. Once the board has considered and selected their preferred option, their legal adviser will draft all agreements (including tax clauses). The CFO of the business will provide the legal adviser with financials to support the agreements. In perfect synchronicity, the entity and its tax, business and legal advisers will need to deliver on all the agreements, from day one opening figures, stock, assets, and employees.
One of the legal ramifications is that if it is related to employees, all employee contracts will need to be re-drafted and signed. If it is a share transaction, then the business may have to consider change of control provisions.
The intangibles
There is a strong emotional element to restructuring. After all, this can be a heavy task for an organisation. There is a high level of complexity to…
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Read the full article by Liz Pinnock. Head: Group Legal, RSM South Africa, as well as a host of other topical management articles written by professionals, consultants and academics in the August/September 2020 edition of BusinessBrief.
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