Corporate Restructuring By Eki Durojaiye
In today’s business environment, the only constant is change. Companies that refuse to change with the times face the risk of their product line becoming obsolete. When the economy becomes unstable, small businesses often feel the effects first. Similarly, changes within a small business’s industry, such as a new competitor or weaker demand, may cause its profits or productivity to decrease. In such cases, a small business may try to restructure its operations to improve efficiency or prevent the company from falling.
Restructuring in the context of corporate management is the act of reorganising the legal, ownership, operational or other structures of a company for the purpose of making it more profitable or better organized for its present needs. Corporate restructuring can be driven by a need to reposition an organisation for competitive advantage, incorporate new technology, resuscitate an organisation’s financial status amongst others.
Types of Restructuring
1. Financial Restructuring: It involves reorganising the assets and liabilities of corporations, including their debt-to-equity structures, in line with their cash-flow needs to promote efficiency, support growth, and maximize the value to shareholders, creditors and other stakeholders. There are several reasons that may trigger the need for financial restructuring, such as, inability to fulfil financial obligations, business expansion etc. In distressed situations, a recapitalization can stabilize a company’s capital structure and cash position. There are several methods of financial restructuring but a few will be discussed here.
2. Operational Restructuring: This form of restructuring is the identification of the causes of operational underperformance and the development of a strategy to achieve improvement. That is, operational restructuring focuses on the profitability of operations. It aims to extend the scope of action for a company and to give confidence to its stakeholders, especially lenders, as well as employees and suppliers by helping to solve the problems of suboptimal performance. It does not address the capital structure or financing structure of a company. Operational restructuring plan will usually cover the following areas:
• Review of products and markets to assess their contribution to profit;
• Alignment of costs with revenues and making appropriate cost reductions;
• Rationalisation of operations and facilities to improve efficiency and release cash;
• Disposal of underperforming and non-core businesses;
• Identification of skills and resource gaps in the management team.
Methods of Restructuring
1. Rebranding: It is the process of changing the corporate image of an organisation. It is a market strategy of giving a new name, symbol, or change in design for an already-established brand. The idea behind rebranding is to create a different identity for a brand from its competitors in the market. There are several reasons for corporate rebranding. Companies often rebrand in order to respond to external and/or internal issues. Rebranding could also be deployed as a marketing tool for competitive advantage. It could be utilized as a means of hiding malpractices of the past, thereby shedding negative connotations that could potentially affect profitability. Rebranding is also a way to refresh an image to ensure its appeal to contemporary customers and stakeholders. What once looked fresh and relevant may no longer do so years later. There are several elements of a brand that can be changed in a rebranding these include the company name, the logo, nature of business, and the corporate identity.
2. Recapitalisation: This is another strategy that can be deployed to stabilise or shore up the capital structure of a company. If a company believes that its existing equity and debt ratio is proving to be a problem, then recapitalization is the way to get to the right ratio. Recapitalization is the financial reorganization of a company’s debt and/or equity. The goal can be to improve a company’s capital structure or realize a liquidity event for an owner who wishes to sell a portion of his business and realize some of the value they have created. Essentially, the process involves the exchange of one form of debt or equity for another, often times whereby an equity owner (business owner) sells a portion of equity to an outside party who takes a minority or majority stake in the business. By raising debt or equity, a company consequently increases the available liquidity that may be needed to finance further investments, or perhaps an owner’s partial or full exit.
3. Mergers and Acquisition: These are one of the most common methods of corporate restructuring. Though mergers and acquisitions are sometimes used interchangeably, they do have some distinctions. Generally, a merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. This rationale is particularly appealing to companies when times are tough. Stronger companies will usually buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. The goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term.
4. Takeover: It is virtually the same as an acquisition, except that “takeover” has a negative connotation, indicating the target does not wish to be purchased. When an acquiring company makes a bid for a target company, it is called a takeover. If the takeover goes through, the acquiring company becomes responsible for all of the target company’s operations, holdings and debt. When the target is a publicly traded company, the acquiring company will make an offer for all of the target’s outstanding shares. The procedure for takeover is provided in sections 131 to 151 of Nigeria’s Investment and Securities Act, 2007.
5. Arrangement on Sale: This is one of the internal reconstruction methods towards the survival of an ailing company. Here, the members of a General Meeting are empowered to resolve by way of special resolution that the company should be wound up and that the liquidator appointed and authorized to sell the whole or part of its undertaking or assets to another corporate body. The consideration for the sale may be cash, shares, debentures or policies which should then be distributed in species amongst the members of the company in accordance with their rights in liquidation. The main difference between the liquidation process in corporate restructuring and that of dissolution of the company lies in the fact that the winding up process embarked upon in corporate restructuring usually results in the purchase of the assets and liabilities of the insolvent company by another corporate entity. On the other hand, the winding up for dissolution of a company brings the company to a permanent and the assets are distributed in accordance with its Articles of Association. The guide to embarking on arrangement on sale is provided in sections 538 to 540 of Nigeria’s Companies and Allied Matters Act (CAMA) 2004.
Benefits of Restructuring
Just as there are many reasons companies might restructure, there are many benefits of restructuring a company and they include:
• Reviving a declining business
• Increasing the net worth of the company
• Gaining competitive advantage
• Repositioning for growth
• Business expansion
Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. A company that has been restructured effectively will hypothetically be more efficient, better organized and better focused on its core business. Through restructuring, a company can eliminate financial harm and improve the business. Restructuring forms are powerful tools that can only achieve the desired outcome when handled by competent hands. In order to realize the ideal outcome, we would recommend seeking advice from experienced advisors who have been through the various restructuring process countless times before.
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* Eki Durojaiye is Senior Counsel at lawBrief (Solicitors & Advocates).