FormalitiesDate of reorganisation
Can a corporate reorganisation be backdated or deemed to have already taken place, for example from the start of the financial year?
In most cases, transactions must be implemented before or on a target effective date (eg, by the end of a financial year). Most transactions (such as share transfers, contributions, distributions, assignments, novations, loans, etc) cannot be deemed to have taken place before the respective documents are finalised and executed (ie, they do not have retroactive effect). This makes it crucial - and sometimes challenging - to prepare and execute the transaction documents before the deadline. However, certain reorganisation steps allow for retroactive effect. For example, check-the-box elections under US tax law allow for filings with retroactive effect back to 75 days before the filing date. Additionally, US law allows a transaction to have different effective dates for legal and tax or accounting (or ‘economic’) purposes. For example, a merger transaction can have one effective date for tax and accounting purposes and another effective date for the transfer of legal title.
What documentation is required in a corporate reorganisation?
From a corporate perspective, the board of directors or managing body of the companies involved must approve the transactions and the documents required to implement the transaction steps. Additional to board approvals, it may be advisable (or required to achieve the desired tax treatment) to document approval of transactions in a reorganisation plan executed by the companies involved. On or near the same day as board approvals, the specific transactions may occur and these are recorded in agreements, such as contribution agreements in exchange for shares or share premium of the transferee, sale and purchase agreements in exchange for cash or promissory notes, assignment agreements and distribution agreements. In certain circumstances, actions taken before board approvals may be ratified by the board. However, ratification is generally not available to approve a distribution retroactively. When the values used in the transaction need to be adjusted after the transaction has taken place, an adjustment agreement can be prepared and mistakes in the values assigned can be corrected in a clarification agreement.
To reduce cash transfers, intercompany loan agreements or promissory notes are often prepared. When an amount of cash should be transferred through certain companies in a group, the parties may prepare a settlement agreement to ensure all claims are settled between the parties through the chain. Sometimes, payment direction letters are also drafted with this same purpose.
If the reorganisation involves a change of employer or employees, then an employment offer letter or employment agreement with the new employer should be issued or entered into with employees. If WARN obligations are triggered due to a RIF, then proper notice should be prepared and provided to employees or their representatives, and state and local governments.
Depending on the desired go-forward intercompany transactions, written and executed intercompany services agreements, licence agreements, etc, should be put in place. Each company involved should keep the original documentation at its business or registered address, together with its books and records, and should update the minutes books and shareholder ledgers, and cancel share certificates and issue new ones in the name of the new shareholder.
Representations, warranties and indemnities
Should representations, warranties or indemnities be given by the parties in a corporate reorganisation?
It is uncommon to include extensive representations and warranties in reorganisation documentation. While there is an emphasis for documents to retain arm’s-length characteristics, lengthy representations and warranties require additional due diligence (not typically required in intragroup scenarios).
Most representations and warranties focus on due authority of the transferor, absolute transfer of title, absence of litigation proceedings and compliance with applicable laws. Representations related to title to shares or assets may typically be bifurcated between transfer of economic ownership (which is usually under the control of the transferor and can be timed to meet deadlines) and transfer of legal title (which often requires additional steps, such as filings and registrations).
Assets versus going concern
Does it make any difference whether assets or a business as a going concern are transferred?
From a corporate perspective, a business as a going concern is akin to an equity transfer, in that the business will continue to operate as normal without a threat of liquidation or dissolution for the foreseeable future. In this situation, it is important to determine whether the business has any contracts with change-of-control provisions and to coordinate any third-party notices or consents. For assets, it is important to evaluate whether they are subject to potential third-party consents or notifications, which can be found in leasing or pledge arrangements, co-ownership agreements, liens, etc. If there is a difference between the two transactions for federal income tax purposes, that difference would carry over to the states, most of which would use federal taxable income as a starting point.
For sales and use tax purposes, states offer an occasional sale exemption. In some states, for example Texas, the exemption requires the sale of the business’s entire operating assets. There is no requirement to include intangibles in the sale, nor is there a requirement for the buyer to continue to operate the business post-acquisition.Types of entity
Explain any differences between public, private, government or non-profit entities to consider when undertaking a corporate reorganisation.
Publicly held companies should coordinate with their securities law counsel to ensure all investor communications requirements, and any other stock exchange requirements, are met in relation to a reorganisation. Additionally, contrary to most privately held companies, public company boards cannot be contacted at short notice to sign resolutions. If transactions involved in a reorganisation are not already addressed in the company’s standing umbrella resolutions, additional resolutions might be required. Lawyers should assume they will only have one chance to obtain resolutions from the top board, so the resolutions should be as broad as possible.
With regard to privately held companies, other than the securities laws regulating publicly held companies, few laws differentiate between public and private companies in a reorganisation. However, from a practical standpoint, corporate information of a private company is often not easily available through public means, and private companies are often concerned that any public filings required as part of a reorganisation could reveal more information than they are comfortable disclosing.
Non-profit organisations operate under a different regulatory regime in the US; different states have their own laws regulating the formation and operation of non-profits. With regard to reorganisations, all new companies should conform to the filing requirements and ensure activities assumed by non-profit organisations are allowed under the relevant statutes.
With regard to governmental entities, these entities are typically domestic, and we seldom see them involved in cross-border reorganisations. Most governmental entities are regulated by additional laws that do not apply to private companies, so any reorganisation projects would also require an examination of any necessary licences or permits. Finally, in our experience, most contracts involving governmental entities require consent for assignment, even between related parties.Post-reorganisation steps
Do any filings or other post-reorganisation steps need to be taken after the corporate reorganisation takes place?
From a corporate perspective, whether or not any filings or other post-reorganisation steps are applicable depends on the type of transaction and jurisdiction. In the US, share transfers may require some post-closing steps. Such steps may include:
- cancellation of the old share certificate and issuance of the new share certificates;
- filings or registrations of the share transfer with applicable authorities; and
- updating the shareholders’ register or limited liability company operating agreements.
In many jurisdictions, after a merger takes place, certain post-merger notifications to employees, government authorities, counterparties and other third parties may be applicable. The transfer of a note from one creditor to another normally entails sending a notification to a debtor after such transfer takes place. After a new entity is formed, it may need to be registered with local authorities (eg, tax authorities, social security or pension funds and labour authorities) depending on jurisdiction, and bank accounts may need to be opened for this entity.
If an acquirer in a corporate reorganisation assumes or otherwise continues the employee equity programmes of the target entity, securities law filings may be required. Filings with government agencies may also be required if retirement or pension plans are terminated, or otherwise ‘frozen’ in a corporate reorganisation.
If employees are transferred from one entity to another in connection with the reorganisation, then the usual HR tasks required for onboarding new hires would need to be performed, including payroll setup, benefits enrolment, new employee orientation, policy distribution and acknowledgement, etc.