Reorganising a group of companies

When businesses grow and expand, they often accumulate a range of subsidiaries and associated companies. This can lead to a fragmented corporate structure that is inefficient and difficult to manage. By consolidating these entities under a single holding company, you can:

• Streamline management: Centralise decision-making, reduce duplication, and simplify governance.
• Improve financial reporting: Gain clearer oversight of the entire group’s financial position, making it easier to manage cash flow, debt, and overall financial health.
• Enhance operational efficiency: Standardise processes and leverage shared resources across the group.

In a dynamic business environment, it’s often necessary to move assets and liabilities between group companies to align them with strategic goals. Common scenarios include:

• Asset protection: Transferring key assets (e.g., intellectual property, real estate) to a dedicated holding company to safeguard them from operational risks.
• Balance sheet restructuring: Shifting liabilities between companies to improve the financial strength of certain entities and facilitate better financing terms.
• Operational optimisation: Placing assets with the most appropriate entity to maximise tax efficiency and operational benefits.

Demerger processes are often chosen when business interests within a group diverge or when certain shareholders wish to pursue distinct strategic paths. This can involve separating one or more trading businesses into standalone entities, allowing them to operate independently. There are typically two types of demergers:

• Statutory demerger: This involves splitting a group’s trading businesses into separate companies, often to enhance focus and allow each entity to pursue its unique market strategy. It is governed by strict legal requirements and can offer tax advantages if executed correctly.
• Section 110 Demerger (Insolvency Act 1986): This approach is used when non-trading assets, such as investment properties, need to be separated. It provides a tax-efficient solution for dividing non-operational assets that don’t qualify for a statutory demerger.

Disputes or differing visions among shareholders can lead to the need for a corporate restructuring. By reorganising the group structure, it’s possible to resolve conflicts and create separate entities that align with the differing interests of the shareholders.

• Share swap arrangements: Shareholders in one company may exchange their shares for shares in a new holding company, facilitating a smoother separation of interests.
• Simplifying shareholder agreements: Reorganisation can help streamline complex shareholder agreements, making them more manageable and reducing the potential for future disputes.

One of the primary motivations for corporate reorganisation is to achieve tax efficiency and manage financial risks. While Anthony Gold Solicitors does not provide direct tax advice on such reorganisations, we work closely with your tax advisors to implement tax-efficient structures that align with your strategic goals. Key benefits include:

• Minimising tax liabilities: Strategic asset transfers and demergers can help reduce exposure to capital gains tax and corporation tax.
• Improving investment appeal: A streamlined, tax-efficient structure can be more attractive to investors and facilitate easier access to capital.
• Mitigating legal risks: Properly executed reorganisations help prevent potential legal issues, such as triggering tax liabilities or breaching shareholder agreements.

A corporate reorganisation can impact your business’s commercial operations and financial reporting. Planning for these effects is vital to maintaining stability during the restructuring process. Here’s what to watch out for:

• Impact on financial statements: Reorganisation often involves significant changes to asset ownership and liability structures, which can affect the company’s balance sheet and financial performance metrics.
• Intercompany agreements: Existing contracts and agreements between group companies may need to be revised or replaced to reflect the new structure. This includes updating service agreements, loan arrangements, and intellectual property licences.
• Shareholder agreements & corporate governance: A change in corporate structure may require amendments to shareholder agreements and updates to governance documents to reflect new ownership or management arrangements.

Reorganisation can involve moving assets and liabilities within a group, which may inadvertently impact the solvency status of individual entities. This is particularly relevant when dealing with companies that hold significant debts or are in financial distress. Key issues include:

• Risk of wrongful trading: Directors must be cautious of actions that could be deemed as wrongful trading if the reorganisation affects a company’s ability to pay its debts. This can lead to personal liability for directors.
• Creditor safeguards: Transfers of assets that negatively affect the position of creditors may be challenged as transactions at an undervalue or preferences, under the Insolvency Act 1986.
• Section 110 demergers: For non-trading entities, a section 110 demerger under the Insolvency Act 1986 can be an effective solution. However, strict compliance with insolvency law is required to avoid disputes with creditors.

Reorganising a corporate group often triggers legal and regulatory requirements that must be carefully managed to avoid penalties and complications. Common compliance matters include:

• Company law compliance (Companies Act 2006): Changes to company structures, such as share swaps or new share issues, must comply with the Companies Act 2006. Proper filings and disclosures are essential to maintain legal validity.
• Data protection concerns: When reorganising a group, sensitive data (such as employee records, client databases, and financial information) may be transferred between entities. Compliance with data protection laws, including the UK GDPR, is crucial.
• Employee rights & TUPE regulations: If a reorganisation involves the transfer of employees between group companies, you must consider the Transfer of Undertakings (Protection of Employment) Regulations (TUPE), which protect employees’ rights during the transfer.

There are various legal mechanisms available for corporate restructuring, and choosing the right one is key to achieving your strategic goals while minimising risks. Options include:

• Share transfers: Useful for consolidating ownership under a holding company, particularly when seeking to streamline shareholding structures.
• Dividends in specie: A non-cash distribution where assets (instead of cash) are transferred as a dividend. This can be a tax-efficient way to move assets, provided it is structured correctly.
• Statutory & section 110 demergers: These provide methods to separate trading and non-trading businesses, with specific advantages depending on the group’s assets and strategic objectives.