What measures should be taken to best prepare for a corporate reorganisation?
A detailed planning exercise is an important aspect of any reorganisation to ensure an effective and efficient implementation, and to ensure all objectives are achieved both on a short-term and long-term basis. The planning actions generally required as part of any reorganisation would include the following:
- reviewing the constitution or memorandum and articles of association of the Irish company or companies in question to confirm whether the proposed transactions are permitted or whether any revisions need to be made to facilitate the proposed steps;
- identifying any company law issues or barriers (eg, availability of distributable profits or the need to create same);
- obtaining comprehensive tax and accounting advice;
- identifying material third-party agreements or regulatory authorisations that may require consent or notification (eg, by reason of the relevant contracts or authorisations containing termination on change-of-control provisions);
- identifying whether any shares or assets are pledged as security to a third-party lender or are otherwise subject to a restriction on transfer, requiring relevant releases or consent to be obtained from the third party;
- identifying any shared assets and services and agreeing how such assets and services are to be continued following reorganisation, including on a transitionary basis;
- in the case of a demerger or spin-out undertaken in conjunction with a stock market listing (which may be combined with an initial public offering), consideration of all relevant capital markets laws and regulations, including the listing rules of the relevant exchange, prospectus law requirements, market abuse, and insider dealing laws and regulations; and
- with regard to the above, preparing a detailed step plan identifying the steps and the documents, corporate approvals, signatories and timing required for each of the steps involved, as well as all step dependencies (including any necessary third-party consent and notifications).
What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?
The preliminary issue to be considered from an employment perspective in a corporate reorganisation is the form of the reorganisation itself. If the reorganisation takes place as a business or asset transfer, the TUPE Regulations will most likely be triggered. Where the reorganisation constitutes a transfer for the purpose of TUPE, those employees who are wholly or mainly assigned to the transferring business will have an automatic right to transfer employment to the new or reorganised entity on the same terms and conditions of employment and with their continuity of service intact. Under TUPE, a 30-day information and consultation period with employees is required and this time frame should be considered as part of the overall timeline of the reorganisation. However, TUPE does not generally apply to share acquisitions. It is possible that the integration of two businesses following a share acquisition may give rise to a transfer under TUPE.
In reorganisations involving the transfer or reorganisation of shares in an Irish company, there are fewer Irish employment law considerations. This is due to the fact that the employer entity in this scenario remains the same, albeit with a new owner, such that any subsequent changes to be made to employees’ terms and conditions would have to be made in accordance with the existing variation provisions of the relevant employment contracts or the express consent of the employees. It is generally considered best practice in Ireland to inform employees in this type of reorganisation of the change in owner of their employer entity.
What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?
Different issues will arise depending on whether the pension schemes in question are classified as defined benefit (DB) or defined contribution (DC). Generally speaking, a DB scheme will raise more issues than a DC scheme (for example, funding issues and covenant concerns). The legal nature of the change (that is, whether it is a share or asset transfer) and the reasons for the change will also determine, to a certain extent, the issues that arise in a corporate reorganisation.
In respect of a share transfer (that is, where the target continues to sponsor its own pension schemes following acquisition), both the employer company and the trustees will need to consider the effect of the re-organisation on the employer’s covenant (that is, the employer’s legal obligation, ability and willingness to continue to fund the scheme into the future). This could be a significant concern for pension scheme trustees, and so consideration should be given to communicating with trustees at an early stage of the transaction.
In a business and asset transfer involving employees, TUPE will apply and while, generally speaking, occupational pension schemes are exempt from the automatic transfer provisions of TUPE, both the circumstances of the reorganisation and the pension scheme documentation should be examined, as some pension benefits (for example, early retirement benefits on redundancy and bridging pensions) do not fall within the TUPE pensions exception and could, therefore, transfer with the business.Financial assistance
Is financial assistance prohibited or restricted in your jurisdiction?
Irish companies (both private limited companies and public limited companies (PLCs)) are restricted from providing, directly or indirectly, financial assistance in connection with the acquisition of shares in the Irish company itself or any direct or indirect holding company, unless the transaction in question falls within a number of stated exceptions or the transaction is validated in advance under the summary approval procedure. Under the summary approval procedure, all or a majority of the directors of the company must sign a declaration confirming that the company will be in a position to pay all its debts as they fall due within the 12-month period following completion of the restricted transaction. The shareholder or shareholders of the company must also approve the restricted transaction by special resolution before it can be implemented.
Financial assistance considerations commonly arise as part of corporate reorganisations where loans, capital contributions, guarantees, etc, are being provided. While in most instances it will be possible to validate the transaction using the summary approval procedure, the important consideration, from a planning perspective, is that the validation must be completed in advance of the transaction’s implementation.
The summary approval procedure for validation of financial assistance is not available to PLCs or their Irish incorporated subsidiaries. Accordingly, transactions involving such companies must be structured so that the relevant companies are not providing financial assistance. If they are already providing financial assistance, such assistance is brought within one of the other available exceptions.Common problems
What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?
Many of the common Irish legal issues that arise for consideration in corporate reorganisations are detailed elsewhere in this chapter.
The following are examples of other questions that should be asked at the planning stage of any reorganisation involving an Irish company to ensure all relevant issues are addressed and dealt with.
- What type of valuations are required to be prepared as part of the reorganisation and should the documentation include ‘true up’ provisions to facilitate an adjustment to any consideration paid following completion of any valuation? As additional parties may need to be engaged to perform valuations, these issues should be dealt with as early as possible.
- What details relating to the corporate reorganisation will come into the public domain (for example, as a result of filings required to be made at the CRO), and when will this occur? The group’s public relations team should be made aware of these disclosures to manage any press reporting that may result.
- What are the technical accounting implications of the steps for the Irish company or companies involved? Ideally these should be confirmed in advance with the Irish company’s auditors to ensure the accounting treatment is consistent with the objectives of the reorganisation.
- Does the transaction trigger any clawback of stamp duty or other tax relief claimed previously under Irish or non-Irish tax law? (See question 13.)
Accounting and taxAccounting and valuation
How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?
The accounting treatment of corporate reorganisations are, in our experience, generally treated in a similar way to third-party transactions, but, in all cases, the technical accounting treatment should be fully vetted and confirmed in advance by the group’s accounting advisers and, as appropriate, auditors to identify any accounting issues arising.
In terms of valuations, assets and businesses can generally be transferred at book value where the transferring company has distributable profits. Unlimited companies have more flexibility in this respect as they are not subject to the requirement to have distributable profits in order to make distributions.
The potential corporate governance implications for the directors of an Irish company of transferring a business or asset for less than its full market value should be considered when it arises. This is to ensure there is a business justification for that decision and it may be appropriate, in some instances, for shareholder approval of the transaction to be obtained to support the decision of the directors.Tax issues
What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?
The tax issues to be considered in the context of a corporate reorganisation differ depending on the structure of the reorganisation being applied. Liabilities to tax can potentially arise under a number of different tax heads. The Taxes Consolidation Act 1997 (TCA) and the Stamp Duty Consolidation Act 1999 (SDCA) prescribe that corporate reorganisations can obtain the benefit of certain tax reliefs provided that the various criteria contained therein are met. A summary of the main tax liabilities and relief are as follows.
- Capital gains tax. A tax liability of 33 per cent may apply to companies if ‘chargeable assets’ are being transferred, and to shareholders if shares are being sold or swapped. Relief may be available for the transfer of company assets and the transfer of shares by shareholders under various relieving provisions in Irish tax legislation.
- Corporation tax. There may be a clawback of capital allowances claimed on assets that are transferring as part of a restructuring. The availability of losses carried forward in a trade that is the subject of a restructuring must be carefully considered. The main relief available allowing for the transfer of capital allowances and losses from an existing company to a new company is under section 400 TCA. The transfer of patent rights in return for consideration may be subject to tax at 25 per cent (section 757 TCA).
- Stamp duty. A stamp duty rate of 1 per cent is applicable on the transfer of shares and 6 per cent on the transfer of commercial assets. There are many exemptions and forms of relief from stamp duty that may be relevant depending on the type of asset and restructuring. Generally, stamp duty relief is available under section 80 SDCA and section 79 SDCA for group restructurings.
- Value added tax (VAT). See question 22.
The conditions to be satisfied in order to avail of these types of relief vary significantly and, therefore, all factors of a reorganisation should be considered carefully before seeking to rely on them.