The key to a smooth reorganisation

Many companies or groups may, throughout their lifespan, need to undertake a reorganisation.

The drivers vary from case to case but commonly there may be commercial/financial reasons, a desire to de-risk parts of the business from other parts, they may be undertaken in preparation for a sale of part of the business or shareholders may be wanting to go their separate ways.

Getting a reorganisation right is crucial.  Whether it be moving subsidiaries or assets around or merging or demerging companies, any sort of reorganisation will come under scrutiny on a future sale of, or major investment into, the companies involved.

Not getting it right could have very difficult unintended tax consequences.  The temptation to cut corners or go it alone without professional advice should be resisted.

So, what makes for a smooth reorganisation?

The starting point is your advisers.  A well thought-out, well-planned restructuring will involve your solicitor, tax adviser and accountant working collaboratively.

The planning will always start with tax advice but it’s a good idea to bring your solicitor and accountant on board at an early stage so that any potential issues can be flagged early in the process.

Once the tax planning is at a fairly advanced stage, your accountant (if different from your tax adviser) will need to run the numbers.  It’s likely that valuations will need to be undertaken, draft balance sheets prepared for the various stages and book entries considered.

Finally, once all the planning has been put in place, your solicitor will need to prepare the relevant documentation to effect the reorganisation; this is often the most time consuming element.

A fairly straight forward demerger of two different trades from a single company will commonly require a lever arch full of documents.

So, what are our top tips for a smooth reorganisation?

• Tax clearance

The tax planning will almost certainly involve an application to HMRC for tax clearance for the transaction and should highlight the tax consequences (if any) of the transaction.  It, together with the detailed tax paper prepared by your tax adviser will form the road map for the reorganisation.  If any circumstances or information changes throughout the process, it may be necessary to apply to HMRC again for amended clearance.

• Reserves, Reserves, Reserves!

In order to undertake certain steps in a reorganisation, a company will usually need sufficient distributable profits at the time that relevant step is undertaken.  A careful analysis will therefore need to be undertaken to ascertain the reserves position at that point (taking into account any steps that have taken place immediately prior as part of the reorganisation).  Hence the need for input from the company’s accountant and trial balance sheets at an early stage.

• Timing

It is likely that the various steps to the reorganisation will need to be undertaken in a specific order.  Careful drafting of the paperwork is necessary to ensure that this order is accurately reflected.  Where shares are being moved around or dividends paid, consideration will need to be given as to who is the relevant registered owner of the shares at the time (and so eligible to sign any stock transfer forms, shareholder written resolutions and receive dividends) as there is normally a delay in being able to update the registered owner whilst stamp duty is dealt with.

If necessary, there are ways around the delay, using a transfer of beneficial interest and a declaration of trust, but again, this needs to be thought about in advance and factored into the drafting.

Where there are third party elements (transfers of property from third parties, reductions of capital that need to be registered at Companies House, lender requirements) etc, these will all need to be co-ordinated and factored in to the process and timescales.

• Stamp duty clearances

Certain of the reliefs from payment of stamp duty that apply on a reorganisation are not automatic and require an application to be made to HMRC after the reorganisation has taken place.  These applications require detailed supporting documentation and should be prepared and submitted to HMRC promptly after the reorganisation.

In summary therefore, collaboration and planning are key to a successful reorganisation and this should be factored into timescales.  A reorganisation is ideally something that should not be rushed and so we would always recommend putting your team together well in advance of any intended deadline for completion.

• https://parissmith.co.uk/