Legal and regulatory frameworkTypes of transaction
What types of transactions are classified as ‘corporate reorganisations’ in your jurisdiction?
In the United States, the term ‘corporate reorganisation’ can be applied to a wide variety of transactions, but typically it refers to the intra-group transfers of shares or assets relating to mergers, consolidations, spin-offs and split-offs, recapitalisations, and operational and supply chain restructurings. In addition to the transfers of shares and assets, sometimes entire business lines will be transferred between entities in the same corporate group or integrated with other recently acquired businesses. Other transactions that may fall under the ‘corporate reorganisation’ umbrella include transactions related to inter-company debt and receivables as well as cash repatriation transactions.Rate of reorganisations
Has the number of corporate reorganisations in your jurisdiction increased or decreased this year compared with previous years? If so, why?
All business activity is affected by fluctuations in economic conditions, but when it comes to corporate reorganisations, the variety of drivers means demand is relatively constant.
A reorganisation may be operational, whereby there is a change in how the underlying business operates; or financial, whereby the funding and capital structure changes but the business continues to operate in the same way.
The need to improve operational efficiency and remain competitive can motivate a business to undertake an internal reorganisation, regardless of the prevailing external economic circumstances. Of course, there are other external one-off factors not related to internal drivers of a company, such as changes in law or regulation or in the general economic environment or mergers and acquisitions (M&A) activity, that may trigger short-term increases or decreases in the number of reorganisations, as new opportunities or previously unavailable options open up.
However, on the whole, demand for corporate reorganisations is to some extent independent of external factors and exists throughout the economic cycle.Jurisdiction-specific drivers
Are there any jurisdiction-specific drivers for undertaking a corporate reorganisation?
Corporate income tax changes are anticipated given the arrival of the new Biden administration. As a result, we are seeing some corporations engage in reorganisation in anticipation of those changes.
In addition, under the Biden administration, antitrust and other regulatory scrutiny is expected to be heightened, and companies are therefore packaging assets and undertaking intra-group transfers to prepare for potential acquisitions or divestitures.Structure
How are corporate reorganisations typically structured in your jurisdiction?
There are many ways to structure a corporate reorganisation in the US (eg, sale, distribution, contribution, liquidation, merger or, in certain jurisdictions, legal demerger). The selected method will depend on the facts and circumstances and the desired goals of the reorganisation, and to some extent on the state laws that govern the relevant entities or assets.
When planning the proposed reorganisation structure, a number of key factors should be considered. First, care should be taken to ensure that a corporate reorganisation is feasible in all aspects. For example, prior to any distribution, attention must be paid to whether the involved entity has sufficient distributable reserves to make the distribution. If not, either the plan needs to be adjusted or an alternative approach, such as a capital reduction, must be undertaken. Timing is another key factor to consider; in many jurisdictions, there are often required waiting periods for particular corporate steps. There may also be delays in certain governmental filings, which may be difficult to predict in advance. In addition, organisational documents of the entities involved must be reviewed to determine what requirements apply to implement the proposed steps. For instance, in certain circumstances, shareholder approval in addition to board approval may be required, or parties may need to waive pre-emptive rights or otherwise comply with certain debt covenants.
It is sometimes possible to structure the reorganisation so that it is tax free for US tax purposes. For example, section 368 of the Internal Revenue Code (IRC) provides for certain tax-free reorganisations.
In all events, transactions between related parties should be at arm’s length; namely, the terms should be similar to those between unrelated parties. In the event the corporate reorganisation transactions involve a public company, the relevant US securities laws must also be complied with.Laws and regulations
What are the key laws and regulations to consider when undertaking a corporate reorganisation?
Generally, US laws regulating corporations are more permissive than most other jurisdictions, leading to typically lower regulatory hurdles for implementing reorganisations. For instance, the US capital protection laws are much more relaxed than most civil law countries. Typically, most states do not require statutory accounts to be filed, and no or minimal filings relating to the change of directors and shareholders. Additionally, US requirements for distributable reserves for dividend distributions may be more informal than requirements in most civil law countries.
One of the first regulatory hurdles parties may face when preparing to implement a post-merger integration is the ‘gun jumping’ rules enforced by the US federal antitrust agencies. These rules restrict parties to a proposed merger from engaging in certain anticompetitive conduct prior to the expiry of the regulatory waiting period. Banned activities include coordination on prices, allocation of customers, and exchange of detailed information concerning customers, prices and product plans. Fines for infringement in recent years have been in the millions of dollars. As a consequence, many parties have been hesitant to begin post-acquisition integration planning until the antitrust regulators have approved the merger. If performed properly, however, integration planning and preparatory steps can commence immediately to avoid the lengthy delay of waiting for final approval.
Notwithstanding the above, new company formations in the United States will still need to be filed in accordance with state law, which will require proper filings relating to issues such as capitalisation, corporate names and management. Additionally, if a US company will have a non-US shareholder due to the reorganisation, or if a US company will have ownership in foreign subsidiaries, certain filings may need to be made with the US Bureau of Economic Analysis. There also might be certain compliance issues relating to privacy and cross-border customer or employee data sharing.
Finally, in 2018, Delaware passed a law allowing limited liability companies (LLCs) to effect legal demergers. Under this law, Delaware LLCs may elect to divide into two or more Delaware LLCs and allocate their assets and liabilities among the entities as they choose, potentially avoiding transfer taxes and filing requirements. This statute resembles the law in many civil law jurisdictions and provides a valuable tool in corporate reorganisations in the United States.National authorities
What are the key national authorities to be conscious of when undertaking a corporate reorganisation?
There are no overarching national authorities in the Unites States that are automatically involved in a corporate reorganisation, other than possibly the Internal Revenue Service (IRS). Companies that are part of a reorganisation should prepare documents with the expectation and assumption that the documentation will be reviewed by the IRS. Companies should ensure that all key terms are filled in, documents are appropriately authorised and executed and document dates correspond to the timelines contained in the master plans and related tax filings.
Other national authorities that could become involved relate to businesses that are highly regulated, such as financial services, pharmaceutical and defence industry companies. In these situations, governmental consents or approvals from the relevant authorities might be required.
Antitrust authorities, the Bureau of Economic Analysis, and in certain cases such as spin-offs by publicly held companies of their divisions, the US Securities and Exchange Commission should also be considered.
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