Following our joint webinar with Grant Thornton on 15 September 2020 where we considered how to (re)align your corporate structure to fit your post-lockdown business plan, we reflect on some of the key themes discussed.
Why now?
The pandemic has resulted in many companies re-visiting their business plans and making changes to future operating models. In terms of delivering those plans, and implementing the new models, there are many benefits to a company ensuring that its corporate structure is aligned to its new plan. Therefore, as we begin to emerge into the “new normal” and consider what the future may look like, companies are asking “can we find ways of optimising our group structure for the purpose of delivering our business plan in the current and future market?”
If the answer is yes, then now is a good time to take action to address this:
- whilst there is corporate memory about the existing structure and what the implications of any simplification may be; and
- to signal to stakeholders the company’s commitment to the future and delivery of its business plan.
Irrespective of recent events, it is always sensible to consider regularly whether a group structure is capable of being streamlined in order to maximise efficiencies and reduce costs.
What to consider
Any corporate simplification will involve a number of legal, tax, accounting and commercial considerations. Key to its success is careful planning and engaging with advisers early to avoid any nasty surprises or roadblocks arising along the way. A simplification project often involves a number of steps and requires careful analysis, for example considering a company’s distributable reserves and reviewing any assets or liabilities being transferred, to ensure the most efficient structure is adopted. In our guide to group reorganisations and corporate simplifications, we look at these key issues and the structures commonly adopted in more detail.
Key themes
There are a number of themes which are always considerations when looking at a corporate simplification project and others which are new considerations for 2020. These include:
1) Availability of reserves
Where the corporate simplification involves the transfer of a business or assets to a new company within the group, it is often necessary to create distributable reserves in the transferor company. This facilitates a transfer at book value. If there are no distributable reserves, the transfer must take place at market value.
The relevant accounts used to assess the distributable reserves of a company are usually its last audited accounts. However, even if they show that the company has sufficient distributable profits, the directors must also consider:
- events which have arisen since the accounts date – for example have those profits been eroded due to current market conditions; and
- what the future cash requirements of the company are.
Historically directors may have been able to give a fairly accurate prediction of future requirements based on historical performance. However the current uncertainty, particularly in some industries where business as usual has not or cannot resume, means directors may take a more conservative view.
If the availability of reserves is likely to be a block to a corporate simplification process, experienced advisers may be able to help in finding ways to cure a negative reserves position and unlock the simplification process.
2) Directors’ duties
The directors of each group company involved in a corporate simplification will need to consider their duties to the company which they are a director of and to ensure that they are satisfied that, at each stage of the project, there is sufficient corporate benefit for the relevant company in undertaking that stage of the simplification project.
One area which directors may be more concerned about in the current climate is any risk of insolvency of a group company that is part of the simplification process. Whilst there are a number of implications of carrying out a reorganisation involving an insolvent (or potentially insolvent) company, one risk is that the transaction could be set aside by a court on application from an administrator or liquidator if it was carried out at an undervalue within the previous two years and at the time of the transaction (or as a consequence of the transaction) the company was unable to pay its debts.
If directors do have any concerns about the solvency position of a company, this should be discussed with advisers as a priority.
3) Pension Schemes Bill
Often simplification projects will involve the potential transfer of employees and consequently their ongoing pension arrangements will need to be considered. The Pension Schemes Bill is making wholesale changes to pensions law. Whilst the legislation has not yet been passed, its purpose is to strengthen the Pensions Regulator (‘tPR’) by making significant changes to its powers in order for tPR to better protect defined benefit scheme members. In the context of a corporate simplification, the proposals which are likely to have an impact are:
- the introduction of an obligation on employers to notify tPR of the sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20 per cent of the scheme’s liabilities; and
- the introduction of the requirement for a declaration of intent to be shared with the scheme trustees and tPR during certain corporate transactions (i.e. sale of controlling interest in a sponsoring employer or sale of a material proportion of the business or assets of a scheme employer with at least 20 per cent of the scheme’s liabilities)
For more information on the Pension Schemes Bill, please see our briefings, Lending to sponsoring employers: A stronger Pensions Regulator, and The Pension Schemes Bill - a company director's perspective.
How can we help?
If you would like to discuss any of the issues in this article please speak to your usual contact at Burges Salmon, or Rupert Weston.
Written by Julie Book and Gregory Nash.