Corporate Restructuring may be described as the process of rearranging a company’s finances, operations, and management to improve its efficiency, effectiveness, and productivity. Corporate restructuring ensures a company can regain its financial stability and viability.
Whereas insolvency is when a company cannot meet its financial obligations as they become due. Defaults may arise due to economic downturns, increased competition, or mismanagement. When a company becomes insolvent, it can no longer pay its debts and continue operations effectively.
Corporate Restructuring and insolvency are closely related as they are designed to address financial distress and improve a company’s economic performance. The process of corporate Restructuring seeks to help a company become more financially stable. In contrast, insolvency is geared toward ensuring that creditors are repaid and minimizing the effect of the company’s financial problems on stakeholders.[i]
The connection between corporate Restructuring and insolvency can further be seen in the fact that Restructuring can often avoid bankruptcy. The restructuring may be the last resort to keep the company afloat when it is in financial trouble and has to re-negotiate its debts with its creditors. The Companies and Allied Matters Act governs corporate Restructuring and insolvency 2020 and Companies Winding Up Rules 2010.
ADVANTAGES OF CORPORATE RESTRUCTURING
Corporate Restructuring usually increases the market share of the merged firm in the case of a merger. It also has the effect of reducing competition where the union is horizontal. Mergers and acquisitions let companies increase in size and enhance their market dominance.[ii] It allows companies to expand their business line by joining other businesses engaged in unconnected fields. It helps lower risk by having a large number of enterprises.
Another benefit of corporate Restructuring is that the corporate entity can capitalize on tax advantages by creating a more tax-efficient corporate structure. The corporate entity may also gain a competitive advantage by acquiring another company with unique technology and enjoy increased operational efficiency.
TYPES OF CORPORATE RESTRUCTURING
- Internal Restructuring
- External Restructuring
INTERNAL RESTRUCTURING
Internal Restructuring becomes necessary when a company has accrued enormous debt and desires to retain its corporate identity without any involvement of third parties.[iii] The aim is to reduce losses and restructure the share capital of the company in a way that balances out the assets and the liabilities. The restructuring process involves the company and its creditors.
INTERNAL RESTRUCTURING STRATEGIES
The internal restructuring strategies available to a Company include:
- Arrangement and compromise
- Arrangement on sale
- Corporate Buy-out
ARRANGEMENT OR COMPROMISE
The arrangement is defined as any change in rights or liabilities of members of a company, debentures holders or creditors of a company or any class of them or in the regulation of a company[iv]. Compromise is an arrangement with creditors and members or a type of them by the company to accept less than they are entitled to in complete and final satisfaction of the debt the company owes. It is important to note that arrangement and compromise must be done with the sanction of the court (FHC)[v]
ARRANGEMENT ON SALE
Under this internal restructuring strategy, the members in a general meeting may, by special resolution, resolve that the company be put into members’ voluntary winding up and that the liquidator be authorized to sell the whole or part of its undertaking or assets to another body corporate. This may be in consideration or part consideration of fully paid shares and distributing them in specie among the company members by their rights in the liquidation.[vi]
CORPORATE BUY-OUT
This is an agreement or arrangement where certain interest groups within a company acquire the interest in shares of others in a company. For example, it could be an employee or management buy-out.
In an employee’s buy-out, the employees may decide to buy out a company because of their job securities or attachment to the company, pool their resources together, and buy out the company’s management.
On the other hand, a management buy-out is an acquisition by the management team (usually the directors and officers) of the company of controlling shares of the company or its subsidiaries by buying them. This is done to prevent a situation in which the company is taken over by third parties who may not have similar missions or visions for the company.
EXTERNAL RESTRUCTURING
External Restructuring involves the company and third parties, usually another company. It results in a business combination that affects companies’ operations not previously under common ownership or control. Here, the existing company loses its existence, and a new company is set up to take over the business of the current company.
EXTERNAL RESTRUCTURING STRATEGIES
- Merger and Acquisition
- Takeover
- Purchase and assumption
- Cherrypicking
MERGERS AND ACQUISITIONS
A merger is a combination of two companies to create a new company. Whereas an acquisition is the purchase of one company by another in which no new company emerges.
TAKEOVER
A takeover is a situation where a person or group of persons acquire or intends to acquire a minimum of 30% shares in a Public Company to take over that company’s control must be made by such a person or group of persons to the shareholders of the target company.
PURCHASE AND ASSUMPTION
Here, the focus is on the rescue of some of the investments in the failing company. Next, the failing company’s liabilities are purchased by another company, which then assumes ownership of its asset. Then, an application must be made to the Federal High Court, praying for the Purchase and Assumption to be sanctioned. Finally, the supposed company undergoes dissolution through a judicial sale of its assets and liabilities.
CHERRY PICKING
This is an external restructuring option aimed at reducing the loss of investment. The company/investor does not take up all the liabilities of the failing company. Still, it can inspect the failing company’s books, assets, and business operations/activities to select those aspects it could save by integrating them into its business activities.
CONCLUSION Corporate restructuring is a vital tool in assisting a failing company to become more financially stable by improving its efficiency, effectiveness, and productivity.
[i] Gaurav J, Corporate Restructuring and insolvency: An Overview https://www.legalserviceindia.com/legal/article-10246-corporate-restructuring-and-insolvency-an-overview.html Accessed March 20, 2023
[ii] PorteBrown, Corporate Restructuring Strategies https://www.portebrown.com/newsblog-archive/corporate-restructuring-strategies Accessed March 20, 2023
[iii] Habeeb Adekola, A general Overview of Corporate Restructuring in Nigeria https://www.aaachambers.com/articles/a-general-overview-of-corporate-restructuring-in-nigeria/ Accessed March 20, 2023
[iv] Section 710 of Companies and Allied Matters Act 2020
[v] Coursehero https://www.coursehero.com/file/p5kt9j4e/Merger-and-acquisition-2-Take-over-3-Purchase-and-assumption-agreement-4/ Accessed March 20, 2023
[vi] Section 714 of Companies and Allied Matters Act 2020
[vii] Section 117 ISA 2007 & Rule 445 of the SEC Rules 2013
Written by Omolumo Adeife for The Trusted Advisors
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