Business restructuring

Jan, 11 2022

Contents:

There are several definitions of this concept. In fact, business restructuring is a process of changing the business structure. Changes are taking place at all levels and in all directions: economic, legal, managerial, production, etc.

From a management perspective, this is one of the ways to respond to changing external and internal conditions. From a legal point of view, business restructuring is a complex matter from the point of view of the procedure of legal registration, requiring a clear and consistent execution of a few procedures. Therefore, at the initial stage of the case, lawyers recommend clients to determine the need for restructuring and the purpose.

Why do we need business restructuring?

1. Reduce costs: temporary and financial.

The functioning of enterprises with a multi-level structure arising in the process of merging groups of companies requires significant costs. Each individual enterprise bears the costs of maintenance, namely, maintaining documentation and accounting, renting premises, and paying for utilities, resolving legal issues. A business with a multi-level structure may incur financial losses due to the correction of violations identified by the control and supervision services for entrepreneurs.

In addition to financial costs, business leaders also spend time and effort.

2. Increase the credit attractiveness.

It is difficult for companies with a complex structural organization to take credit funds from a bank. Because the bank carefully checks the documentation and indicators of not one legal entity, but an entire group of companies. Accordingly, the probability that an error will be found or that the parameters do not meet the requirements of the bank increases.

If the check was successful, then difficulties will appear at the stage of documentation processing. Managers need to prepare a large package of documents for each organization included in the group. Several documents are provided by public authorities for a fee. Therefore, the process will not only be lengthy, but also expensive.

3. Simplify the process of registration of legal documentation.

After changing the form of business, one legal entity can represent the company in negotiations, conclude deals and sign contracts, and form documentation.

The process of collecting and preparing documents for transactions, the procedure for passing inspections from supervisory authorities of the executive power will be simplified.

What is important in restructuring?

The implementation of procedures related to the preparation of the content of accession agreements and transfer acts, liquidation balances, does not cause difficulties. There are no subtleties and nuances in them that could suspend the process. Therefore, the non-obvious points of preparation for reorganization and reissue of securities will be considered further.

1. Determine the number of companies.

There is no universal rule for setting the required amount. The decision is made individually, the final number depends on the industry in which the business is involved, on the scale of activities and the list of representative offices in the regions, the completeness of the production cycle, the number of partners, etc. The decision must be made collectively.

2. Promptly issue licenses and get rights.

The new enterprise formed because of the restructuring should receive the right and licenses to carry out activities. Accordingly, production and work at the enterprise should be suspended at this time. Employees will be out of work; customers will be lost.

To minimize losses, it is necessary to determine in a timely manner which documents need to be reissued, clarify the terms of reissue and the procedure. For example, registration of a license takes about 1 month, registration of real estate – up to 7 days.

Obtaining some certificates, rights and licenses is carried out after a control check, for which you need to prepare. This time also needs to be considered.

3. Fulfill corporate obligations on time.

It is necessary to organize a meeting of shareholders and notify all potential participants of the date of its holding no later than 20 days before the start. If a shareholder cannot attend the meeting, then he needs to issue a power of attorney for his representative, which also takes time.

4. Notify the bank.

If a loan has been issued to a legal entity, it undertakes to notify the bank of the reorganization. It is better to do this before the start of the procedure, otherwise the bank may consider the actions of the borrower illegal, terminate the contract, and request early repayment of the loan. In the worst case – to initiate a lawsuit.

5. Clarify the terms of large contracts.

To find out more precisely whether the changes adopted in connection with the reorganization will not violate the terms of the contracts. For example, if a company has state contracts for the use of state or municipal property, then it is necessary not to include a legal entity in the list of companies that will undergo reorganization.

6. Consider the requirements of competition law.

When restructuring the system, it is worth considering how many participants will be included and what is the value of their assets. In order not to fall under the supervision of antimonopoly authorities, it is necessary to soberly assess the scale of expansion and the size of assets.

Also, when interacting with the executive antimonopoly authorities, problems arise with the establishment of a list of responsible persons who should attend such meetings.

Restructuring objectives

As mentioned earlier, reorganization is considered as a tool with which multidirectional goals can be achieved, namely:

  1. In economic terms.

    The Company is freed from illiquid assets, optimizes financial flows, accordingly, reduces maintenance costs, including by reducing the amount of taxation.

  2. From the point of view of management.

    Production processes are being debugged; it becomes possible to bring a product (service) to new market niches. The competitiveness of the company increases accordingly. Interaction between the heads of different companies becomes operational and therefore effective.

  3. From a legal position.

    The processes of preparation and execution of documentation, conclusion of contracts and contracts are simplified.

Types of restructuring

It depends on several parameters: external conditions, internal reserves of the company and the interests of managers. Changes in the process of restructuring the business system concern not only the type of internal organization, but also the capital structure and type of activity.

There are several criteria for classifying the procedure.

1. Depending on what stimulated the reorganization, the following types of reorganization are distinguished:

  • Active, respectively, the internal stimulus comes from the group members.
  • Passive, the decision was influenced by external factors.

2. According to the scope of the types of activities, the changes are divided into:

  • Affects a separate direction.
  • Relates to several elements of activity.
  • Complex – covers all areas.

3. Depending on the stage of development of the company:

  • Strategic – aimed at maintaining the normal functioning of the enterprise in the present and future.
  • Operational – aimed at overcoming the crisis of the organization.

4. According to the direction, the procedure is divided into:

  • Internal – changes take place only in the internal environment.
  • External – the ways and types of interaction with the external environment are changing.

5. According to the degree of dependence:

  • Decentralized. The company independently and at its own expense undergoes the procedure.
  • Centralized. Reorganization takes place at the initiative of state (municipal) bodies and at the expense of funds allocated by them.
  • Mixed. It is implemented at the expense of own and attracted funds.

6. Depending on the number of operations, it is divided into one-stage and multi-stage.

7. According to the pace, sequential and abrupt restructuring is distinguished.

8. According to the time spent – short-term, medium-term, and long-term.

The procedure for restructuring

The algorithm of the procedure will be different for different companies. Because organizations differ in their market position and production, personnel and economic potential, scope of activity and specifics of work.

The main stages of the process are the following:

1. Definition of goals. This is the beginning of the campaign, managers and top managers must clearly define why and how, in which direction and within what time frame the reorganization will be carried out.

2. Research. At this stage, the indicators of the current state and the indicators predicted because of the reorganization are determined. Problem areas and prospects are identified. The research is carried out using methods and techniques suitable for financial and operational analysis.

3. Development of an action strategy. A document is being formed in which all possible options and alternatives are prescribed. The probability of occurrence of risks and the scale of their consequences are assessed. A forecast is made, qualitative and quantitative indicators of the company’s activity are established when choosing each of the strategic options. As a result, one way of movement is chosen, the rest remain as alternatives in case of changes in the internal and external environment.

The development program and the adjustment program attached to it must be drawn up fully, otherwise the restructuring procedure will be carried out with errors. Fixing errors will take a lot of time and money. Therefore, managers can ask for help in drawing up a program in a consulting company.

4. Implementation of the program. During the implementation, indicators are monitored, the correctness of the strategy choice is evaluated and its adjustment, if necessary.

5. Assessment, summing up. Data is collected, key indicators are systematized, and their evaluation is carried out. The results are summed up, the success of the campaign is evaluated, and an analytical report is compiled.

Restructuring is a long and time-consuming process, covered by many legal nuances. To avoid mistakes in the procedure, it is worth seeking help from 
VALEN lawyers.

Competent specialists will help managers prepare documentation at each stage of the reorganization, talk about the nuances of the procedures and the current requirements of the legislation.

Author of the article
Business restructuring
Valentina Khlavich
Managing Partner
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