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?
Where a group wants to give effect to a step from a given date in the past, it is possible to state in the contract that parties agree that the step is to take effect from an earlier date. This will only be an effective agreement between the relevant parties, and will not alter obligations to third parties, in particular to HMRC. A company’s auditor may question attempts to give retroactive effect to a reorganisation, so it is prudent to consult the auditor before undertaking reorganisation transactions.
If steps or a reorganisation has occurred historically without formalisation, then steps can be taken to ratify and document the transactions that were undertaken. If this is the case, there will usually be evidence in the form of accounts and bank statements. Where reorganisation steps are documented retrospectively, the documents may state that the steps took place on an earlier date, notwithstanding that the document recording it is dated with a later date, though actions that require certain formalities to be complied with, or registrations or notifications to be made, will only take effect when the relevant formalities, registrations or notifications have taken place.
The above situations are not the same as backdating documents (ie, dating a document with an earlier date than that on which it is actually executed). Backdating documents can result in a number of criminal offences being committed, including under the Theft Act 1968, the Fraud Act 2006 and the Forgery and Counterfeiting Act 1981, and may additionally constitute a misrepresentation, which could give rise to civil liability.Documentation
What documentation is required in a corporate reorganisation?
It is not usually necessary to include extensive protections in documents between members of the same group, so the documents implementing a reorganisation are generally shorter and less detailed in their content. However, it is nevertheless important that the transactions undertaken and their terms are properly recorded, authorised and executed. In some instances, a more arm’s-length approach may be appropriate, such as where the solvency of one of the parties is an issue or where one of the parties may be sold following the reorganisation.
Reorganisations involving a transfer of shares or a business typically involve the following documentation:
- an asset or share purchase agreement;
- formal transfer documentation (eg, stock transfer forms for shares, property transfers or assignments, assignments or licences of intellectual property rights, assignments, or novations of contracts, including licences);
- ancillary documents, including board or shareholder minutes or resolutions, notices to employees, HMRC notifications, clearances or applications for relief, loan agreements (if consideration for the transaction will be left outstanding as an intra-group loan), releases from charges, new banking security documentation; and
- other documents for separation purposes (eg, transitional services agreements, service agreements and additional intellectual property licences).
Should representations, warranties or indemnities be given by the parties in a corporate reorganisation?
It is not common practice for the parties to a reorganisation to include extensive protective provisions in the documentation implementing a reorganisation. Transfers are often made with either no warranties or very limited warranties covering, for example, a few key matters, such as the transferring party’s title to the relevant assets or shares. A warranty on title is advisable for the purposes of satisfying the directors’ duties for the directors in the buyer. The transferee’s directors may also want the documentation to confirm that all major known liabilities are disclosed; although, where the parties have common directors this may not be considered necessary. It is not common to include representations, indemnities or provisions relating to confidentiality, price adjustments or post-transfer conduct in intra-group documentation; however, as noted above, a more arm’s-length approach may be appropriate where one party may be sold following the reorganisation. Regardless of the terms of the documentation, purchasers may consider it necessary to seek indemnification or warranty protection from sellers in relation to pre-sale reorganisations affecting a target company.Assets versus going concern
Does it make any difference whether assets or a business as a going concern are transferred?
From a tax perspective, a transfer of a business as a going concern is outside the scope of VAT. The VAT treatment of a transfer of assets that do not comprise a going concern will need to be considered individually, but it is likely that VAT will be payable where assets are transferred other than as part of a going concern.Types of entity
Explain any differences between public, private, government or non-profit entities to consider when undertaking a corporate reorganisation.
As noted above, additional restrictions, such as the prohibition on financial assistance, apply to public companies, potentially making reorganisations of public companies and their groups more challenging. In addition to company law issues, public companies listed on a stock exchange will need to comply with the rules and requirements of the exchange, which may include additional requirements, restrictions and disclosure obligations, such as in relation to transactions with related parties.
Governmental and public bodies are often created by statute, so the relevant statute that created them will need to be considered and reviewed for any specific rules and restrictions applicable to them.Post-reorganisation steps
Do any filings or other post-reorganisation steps need to be taken after the corporate reorganisation takes place?
Post-reorganisation steps and filings often include:
- announcements (particularly relevant if one of the companies in the group is a listed company, subject to Listing Rules and DTRs);
- applications to HMRC for stamp duty relief or stamp duty land tax relief;
- registrations of the new proprietorship details in respect of Intellectual property assignments;
- notifications to landlords as required under lease terms;
- execution of novations and relevant notices of assignment to customers and suppliers;
- administrative matters, including documentation for insurance, PAYE, payroll, pensions and VAT;
- Companies House filings (eg, registration of security and notifications of changes to persons with significant control of an entity); and
- updating company books (in particular, the target).