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Restructuring doesn’t have to be a messy ordeal

Posted on 8 November 2017

Restructuring doesn’t have to be a messy ordeal

A company's decision to restructure can be prompted by a number of different things – it could be as a consequence of success, the result of disagreements, or simply because of commercial imperatives. A restructuring may be considered, for example, because of a founder leaving, a dispute amongst shareholders, a disposal of part of the business or the acquisition of another business or company. Reckitt Benckiser, for example, recently announced plans to reorganise its business into two units – one encompassing health and the other hygiene and home products – after its June 2017 acquisition of US baby formula manufacturer, Mead Johnson.

As we have noted above, sometimes restructuring is borne out of conflict. Disputes among shareholders can result in a group’s assets having to be divided up, rather than continuing to be held jointly. When dealing with this sort of restructuring, it’s particularly important for all parties to have a common goal, and shareholders can look to reduce the risk of disagreements in the event of a dispute by having a shareholders agreement in place from an early stage. Whilst shareholders often start a business with a common ethos and view, circumstances and people change. Having an agreement in place which sets out what should happen upon a divergence of views can save a business from being destroyed as a consequence of a falling out between owners and the subsequent stalemate.

Restructuring can cut right through the business, raising many questions and taking up a significant amount of management time to ensure that everything ends up where it should be. It’s important that this commitment is understood at the outset, and all parties agree that the restructuring will result in the desired outcome. Otherwise, the wheels can quickly come off.

For example, if a group wanted part of its business to spin off into a standalone entity, it’s crucial to ascertain what that entity needs in order to operate on its own. If it is dependent on services from individuals that are employed elsewhere in the group or on the use of assets owned elsewhere in the group, certain agreements or licences may need to be put in place to ensure it has what it needs to continue to run and, if a sale is being considered, to be an attractive prospect for a potential buyer.

Restructuring can also be an opportunity for a spring clean. Contracts can be redrawn, arrangements can be formalised and staff incentivised. When businesses are at an early stage and growing organically, some attributes that are often found in more mature businesses can be understandably parked or overlooked.

Our two key tips for companies considering a restructure are:

  1. Before you start, have a clear understanding of the existing structure of the business, including where the existing assets, liabilities, contracts, employees and other aspects of the business sit. Having a clear starting position (including collated copies of any contracts which may be affected by the reorganisation), will not only assist i cutting down the time that the reorganisation may take, but will also assist in ensuring that there are not any unintended consequences, such as the termination of key contracts or the triggering of debt repayment because of a change of contracting party.
  2. Once you have decided what you want to achieve, consult your advisers before any steps are implemented. There may be tax clearances that can be obtained, or specific structuring that can be used to achieve your objectives whilst minimising the impact on your business, whether from a commercial, practical, legal or tax perspective.

A reorganisation can provide a useful opportunity to consider and address the business’ current needs. Ultimately, if you don’t get the right advice, you could find that there are unforeseen and unintended consequences.

A version of this article first appeared in City AM on 16 August.

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