By Habeeb Adekola – AAA Chambers
Corporate restructuring is a redesigning process that is practised all over the world. For a corporation to survive in Nigeria today, it must be possessed with sufficient drive for growth. This is because the competitiveness of the commercial landscape in Nigeria has made continuous development an inevitable phenomenon in corporate governance. Simply put, any corporation that fails to embrace growth and development will be left behind by its peers.
While it is not untrue that corporate growth and development can also be achieved through brand development, management shakeup and similar options, drastic situations require drastic solutions. That drastic solution is corporate restructuring.
WHAT IS CORPORATE RESTRUCTURING
In order to have a full understanding of what corporate restructuring means, it is expedient to give a simple definition of the individual words that make up the phrase.
First, the term “corporate” according to the Black’s law dictionary means something relating to a corporation or a business entity.
On the other part, to “restructure” an organization or system means to change the way it is organized, usually in order to make it work more effectively.
Dripping from the foregoing, therefore, we can safely conclude that corporate restructuring is the process of reorganizing a corporation or a business entity in order to make it work more effectively.
THE NEED FOR CORPORATE RESTRUCTURING
Corporations, just like human beings have the tendency to fall ill. When a man falls ill, he is taken to the hospital and treated accordingly. The kind of treatment would depend on the severity of the illness. While some illnesses require just mild treatments, some others cannot be treated without the introduction of external factors like kidney replacements.
TYPES OF CORPORATE RESTRUCTURING
- Internal restructuring
- External restructuring
Internal restructuring is generally employed when a Company has a large debt profile and the Company desires to retain its corporate identity without the involvement of any third party.
INTERNAL RESTRUCTURING OPTIONS
The methods of internal restructuring available to a Company include:
- Arrangement and compromise
- Arrangement on sale
- Buy-out (e.g management buy-out, shareholders buy-out, employee buy-out)
ARRANGEMENT ON COMPROMISE
Arrangement is defined as any change in rights or liabilities of members, debentures holders or creditors of a company or any class of them. Compromise is essentially an arrangement by a company with its creditors and/or members or a class of them, to accept less than they are actually entitled to in full and final satiscations of the obligations which the company owes to them. However, it must be noted that arrangement and compromise must always be with the sanction of the court (FHC)
ARRANGEMENT ON SALE
Arrangement on sale is one of the internal reconstruction methods towards the survival of an ailing company. Here, the members of a General Meeting are empowered to resolve by way of special resolution that the company should be wound up and that the liquidator appointed and authorized to sell the whole or part of its undertaking or assets to another corporate body. The consideration for the sale may be cash, shares, debentures or policies which should then be distributed in species amongst the members of the company in accordance with their rights in liquidation. The main difference between the liquidation process in corporate restructuring and that of dissolution of the company lies in the fact that the winding-up process embarked upon in corporate restructuring usually results in the resurrection of the company in another form. On the other hand, the winding up for dissolution of a company brings the company to a permanent end since the assets are distributed to those entitled according to the rules of distribution of assets of a dissolved company.
This is an agreement or arrangement where certain interest groups within a Company acquire the interest in shares of others in a Company. It may be in the form of an Employee’s buy-out or a 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 and pool their resources together and buy out the management of the Company.
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 controlling shares.
MBO is the acquisition, by the management team of a company, of controlling shares of that company or its subsidiaries with or without third party financing.
MERGERS AND ACQUISITIONS
It is instructive to begin by pointing out that even though mergers and acquisitions are sometimes used interchangeably, they do have some distinctions. Generally, a merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. For mergers, the emerging entity could assume an entirely new name or retain the identity of one of the merging companies.
WHY DO COMPANIES MERGE?
Mergers and Acquisitions may be initiated for any of the reasons below:
- Risk Diversification
- Stock Exchange Quotation
- Technological Drive
- Management Expertise
- Desire for growth and increased market share.
- Survival of regulatory requirement for consolidation
CATEGORIES OF MERGER
Mergers are classified into three types namely horizontal, vertical and conglomerate mergers.
- Horizontal mergers: Horizontal is one involving direct competitors. Thus, a horizontal merger is a combination or fusion of companies in the same line of business. Thus, a merger of two or more banks is a horizontal merger.
- Vertical mergers: Vertical merger is one between companies in a non-competitive relationship. That is, a vertical merger is a combination or fusion of two or more companies which are engaged in complementary business activities. e.g. a packaging company and a manufacturing company.
- Conglomerate mergers: A conglomerate merger is a combination or fusion of two or more companies that engage in completely unrelated aspects of business.
THE LEGAL DUE DILIGENCE
This is an investigation usually done by a lawyer of the target company and its business by the acquiring company before the consummation of the merger. Things to investigate during the conduct of legal due diligence includes:
- Ownership of the business
- Business profile
- Intellectual property and technology issues
- Litigation analysis
- Corporate searches
MERGER UNDER THE FEDERAL COMPETITION AND CONSUMER PROTECTION ACT (FCCPA)
Prior to the enactment of the FCCPA, the regulatory body for mergers and acquisitions in Nigeria was the Securities and Exchange Commission and the legal framework was the Investments and Securities act. However, with the enactment of the FCCPA, the regulatory body is now the FEDERAL COMPETITION AND CONSUMER PROTECTION COMMISSION and the legal framework is the FCCPA 2019.
A takeover is virtually the same as an acquisition, except that “takeover” has a negative connotation, indicating the target does not wish to be purchased. When an acquiring company makes a bid for a target company, it is called a takeover. If the takeover goes through, the acquiring company becomes responsible for all of the target company’s operations, holdings and debt. When the target is a publicly-traded company, the acquiring company will make an offer for all of the target’s outstanding shares.
PURCHASE AND ASSUMPTION
This involves another company purchasing the liability of a failing company and assuming ownership of its asset usually at an auction price. An application must be made to the Federal High Court for the P&A to be sanctioned. The assumed company does not go through the formal winding-up process but is dissolved through a judicial sale of its assets and liabilities to the purchasing company.
This is an external restructuring option for a failing company, also aimed at reducing the loss of investment. Unlike Purchase & Assumption, the company/investor is not taking up all the liabilities of the failing/failed company, but is allowed to inspect the books, assets, business operations/activities of the failing company with a view to pick or choose out those aspects it could save by integrating them into its own business activities.
Corporate restructuring is aimed at increasing efficiency, enhancing competitive advantage, achieving synergy and improving firm value. Restructuring pursues the profitability, liquidity and solvency objectives of an organization. A company that has been restructured effectively will hypothetically be more efficient, better organized and better focused on its core business. Through restructuring, a company can eliminate financial harm and improve the business