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Getting The Deal Through

Introduction

Nick Cline, Robbie McLaren and Dan Treloar

Latham & Watkins LLP

Thursday 14 June 2018


‘Corporate reorganisation’ is something of an umbrella term, and it is used in many different contexts to mean a multitude of different things. At one extreme, a reorganisation may refer to ‘paper’ changes to a corporate group’s funding and capital structure that, ultimately, have little or no impact on customers, suppliers or employees of the companies concerned. At the other extreme, a full ‘operational’ reorganisation can involve fundamental changes to the way a business operates, affecting day-to-day trading arrangements with customers and suppliers, having a major impact on employees and affecting regulatory status. It is important to draw a distinction at the outset between the solvent corporate reorganisations that are the focus of this guide, and insolvent or financially distressed restructurings, the latter of which is addressed separately in Getting the Deal Through: Restructuring & Insolvency.

Reorganisations broadly fall into two categories: internally driven and externally driven. Internally driven reorganisations are those caused by factors relating specifically to the group itself, such as trading performance and corporate acquisitions, disposals and mergers. Externally driven reorganisations include factors such as the economic environment, changes in laws, or tax regimes and geopolitical pressures, all of which can be incentives for company managers to undertake business reviews and seek to optimise their company’s performance and prospects. Consequently, the objectives of a reorganisation are hugely diverse and typically multifaceted. In practice, this means that many businesses, and particularly very large businesses, will experience at least some drivers for reorganising frequently or even constantly. Recent years have seen tax-driven inversions and re-domiciliations by high-profile multinationals. Operationally, the relatively low growth environment in Western economies since 2007–2008 has seen corporate groups focus on increasing bottom line profits through cost-cutting and efficiency measures. Analysis by McKinsey in 2016 indicated that approximately 60 per cent of companies in the S&P 500 had undertaken significant cost-reduction or reorganisation activities in the preceding five years.

Unlike many of the areas dealt with in Getting the Deal Through’s series of guides, corporate reorganisations are typically quasi-internal transactions with no real counterparties to the group undertaking the reorganisation. The lack of an adverse party or parties can make reorganisations easier to implement than other transactions in certain respects, as there is often no need to negotiate terms. That is not to say, however, that third parties are not involved, or that there are no challenging issues – on the contrary, corporate reorganisations nearly always involve a number of external and internal stakeholders, so giving due consideration to these parties’ interests is essential. The involvement of multiple third parties means planning, engagement and communication are critical to the successful implementation of a re­organisation. Depending on the nature and purpose of a reorganisation, a company may need to draw on the expertise of legal, financial, tax, accountancy, regulatory, PR, employment and benefits, or other professionals. The mechanisms for – and challenges to – implementing reorganisations are equally varied, with some jurisdictions recognising corporate mergers (such as the cross-border merger regulations applicable in the EU) or providing mechanisms for transferring businesses comprising assets and liabilities relatively easily, while others do not. Large, multi-jurisdictional reorganisations are nearly always complex and time-consuming, making careful coordination, timing and project management between jurisdictions important considerations. Some legal systems have procedures that allow reorganisations to be undertaken privately, whereas others are more public in nature, owing to matters such as creditor notification obligations, or the necessity of involving courts to effect or approve reorganisation steps.

In all but the most straightforward ‘paper’ reorganisations, it will be necessary to identify and communicate with key stakeholders. To employees, regulators and contractual counterparties, simply hearing that a company is undergoing a reorganisation can cause concerns about potential job losses, compliance with regulatory requirements or reductions in creditworthiness and reliability. These concerns can often be addressed by communicating early and clearly with stake­holders and consulting them where appropriate. Employees in particular are afforded extensive rights and protections in some countries and may have an automatic entitlement to be consulted, even where no redundancies or changes to working conditions are anticipated. Consultation obligations can be complicated by the presence of collec­tive bargaining or representation arrangements, and this is a ­particularly important issue in industries and jurisdictions where work forces are unionised or represented by works councils. Where such formal structures exist, the level of engagement may be prescribed; although, even in jurisdictions where that is not the case, the need to preserve industrial relations may dictate a certain level of employee involvement in the re­organisation process. Straightforward ‘paper’ reorganisations involving an intragroup transfer of shares in a wholly owned subsidiary may seem unlikely to present material issues, but may nonetheless inadvertently trigger change-of-control provisions in contracts with customers and suppliers, or result in a breach of the terms of a regulatory licence or finance and security documents. The examples outlined here are just a sample of the issues that may arise in the context of re­organisations. Groups should, therefore, consider the available options in the context of the relevant circumstances, and select the most appropriate mechanisms in each jurisdiction to minimise the risk of unexpected challenges arising at or after implementation of the reorganisation.

Brexit

We must also mention the United Kingdom’s decision to leave the European Union. The decision was described by Jean-Claude Juncker, the president of the European Commission, as posing an ‘existential threat’ to the European integration project that has progressed across much of Europe for decades. While the full terms and implications of the UK’s exit remain unclear 21 months on from the referendum, many large multinational businesses – and particularly those in industries that rely heavily on pan-European regulatory frameworks – have been reorganising their operations in preparation for Brexit. This has mirrored the steps taken by the EU in relation to those European agencies and institutions that have been based in the UK, with the EU27 ministers voting on 20 November 2017 to relocate the European Medicines Agency to Amsterdam and the European Banking Authority to Paris.
Since thus announcement, there has been extensive speculation regarding whether businesses in the pharmaceutical and banking industries are likely to follow the agencies by setting up new operations in Amsterdam and Paris. Even before the recent relocation announcements, many businesses, such as those in the financial services sector (many of which rely on ‘passporting’ rights between the UK and the rest of the EU allowing them to operate across the EU market) had publicly announced plans to migrate operations. The fear of losing rights to access the EU market has already caused banks, insurers, asset managers and other financial services providers to start relocating employees and operations from London to major European financial centres to ensure business continuity in the event that the Brexit terms do not include ongoing passporting rights.


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