Covid-19: Why are Businesses Reorganising?

What is a reorganisation?

A company reorganisation typically involves transferring assets, businesses or shares from one group company to another. Reorganisations simplify group structures and are useful for separating different trading arms of a business.

There is a recent trend among businesses wanting to reorganise their corporate structure. Reorganisations can improve administrative, operational and financial efficiencies all of which may have been put under additional strain as a result of the Covid-19 pandemic.

Why should I reorganise?

1. Shareholders are looking to retire or exit the business:

• A company buyback of shares can often be the most straightforward way to provide an exit route for shareholders if other members are not able to buy them out.
• A management buy-out provides an opportunity for management to acquire the company from departing shareholders.

2. To create or increase distributable reserves in order to:

• Pay dividends. Forced business closures last year led to periods of loss-making for many businesses leaving reduced profits available for distribution. A reduction of capital can create distributable profits which can then be used to pay a dividend to shareholders.
• Distribute specific assets to its shareholders. A dividend in specie could be paid to move assets from one company to another, perhaps as a precursor to the sale of one part of the business. This is useful in times of a change of focus and business strategy and can be an effective way to demerge a business.
• To return surplus cash to shareholders. Perhaps the company had raised capital for a transaction that has not proceeded and wishes to return the monies to its shareholders.

3. Demerge the business into two or more separate entities:

• Demerging sectors of your business can be useful in times of a change in strategy. For example, your property portfolio could be separated into property development and investment properties enabling you to allocate risk more effectively. Generally, a demerger may enable a business to channel resources towards more profitable areas and reduce operation costs.
• A demerger can be useful as a precursor to the disposal of a business or estate planning.
• Perhaps shareholder relationships have broken down and a demerger is a more practical alternative to selling.
• Demerging the business can be useful following a merger or acquisition. Poorly organised business structures can drain finances and resources. Removing a company from a larger group structure can reduce expenditure and unlock shareholder value in the exiting company.

4. Reorganising a company's share capital to create a discretionary trust for a family:

• Shares can be gifted to a trust to be held for the benefit of beneficiaries at some future time. Dividends can be declared on these shares and paid to a trust for distribution to family members.

5. Changing your business structure:

• Perhaps you operate as a partnership but want to change your business to a limited liability company.
• Perhaps you operate from various separate businesses. Creating a group structure under a holding company could better protect your assets and make more business sense. It is possible to transfer shares to a new holding company without triggering any tax charges.

Reorganisations can be complicated, but they can have considerable benefits in removing blocks to growth. If you are considering reorganising your company, we can help by working closely with you and your accountants to achieve the best result from a legal, commercial and tax perspective.