CORPORATE RESTRUCTURING 1 (OPTIONS AND INTERNAL)

CORPORATE RESTRUCTURING

Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction.

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. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process.

Corporate restructuring may take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place.

OPTIONS AVAILABLE FOR CORPORATE RESTRUCTURING

There are several possibilities under the law. They are –

INTERNAL REORGANIZATION UNDER CAMA:

This is an expedient option for a company experiencing economic hardship and whose liabilities outweigh its assets.  A compromise or an arrangement under Section 539 and 540 of CAMA is a veritable option in this regard.

ARRANGEMENT AND COMPROMISE (S. 537)

Compromise and arrangement are used interchangeably.  A compromise is essentially an arrangement by a Company with the creditors and/or the shareholders or a class of them to accept less than what they are ordinarily entitled to as full satisfaction of their obligation.  It may require the company to negotiate with the creditors and request that they relinquish their security or to permit the creation of a prior or parri pasu charge in favour of other creditors.  It is also possible under a compromise, for a company to persuade its creditors to accept shares or part shares and part cash, in satisfaction of their debt.

Alternatively or simultaneously sometimes, shareholders or a class of them may be convinced to vary their rights.  An agreement may be reached with ordinary shareholders to surrender part of their shares to preference Shareholders in lieu of dividend arrears.  Conversely, holders of preference shares may be persuaded to cancel accrued dividends or reduce the fixed rate of dividend or to accept the conversion of their preference shares to ordinary shares.

In extreme cases, a company may resolve to sell all or part of its shares or undertakings to another company or agree with another company to give majority of its voting power to it in consideration for shares of the other company being issued to its shareholders after which it may be wound up if it has no assets left.

PROCEDURE FOR ARRANGEMENT OR COMPROMISE

This is available under section 539 to section 540.

1.      A scheme of arrangement or compromise is prepared by the company, a member or members, creditor or creditors, or the liquidator where the company is being wound up.

2.      Application is made to the court in a summary way by the company or creditor or member of the company, or the liquidator if the company is being wound up, praying the court for an order that a meeting of the company or class of members or class of creditors be summoned in such manner as the court may direct – section 539(1).

3.      If the order is granted, then the meeting is convened accordingly. The notice of the meeting must be accompanied with a statement explaining the general effect of the arrangement, any material interest of the directors of the company and whether it would affect the directors differently from other persons. If it will affect debenture holders, the effect must give explanations. If the meeting is summoned by advertisement, it must contain the above statement or notice of where copies of such statement can be obtained by those entitled to attend the meeting – section 540(1) and (2).

4.      At the meeting, if a majority representing not less than three-quarters in value of the shares of members or class of members, or of the interest of creditors or class of creditors, as the case may be being present and voting either in person or by proxy, agree to the scheme, report shall be made to the court of the meeting – section 539(2).

5.      The court shall refer the scheme to the Securities and Exchange Commission, which shall appoint one or more inspectors to investigate the fairness of the scheme or compromise and make a report thereon to the court within the time specified by the court – section 539(2).

6.      If the court is satisfied as to the fairness of the scheme, it shall sanction it and it shall be binding on all creditors or the class of members of the company, and also the company or in the case of a company in the course of being wound up, on the liquidator and contributories of the company – section 539(3).

7.      An order made to sanction the scheme shall have no effect until a certified true copy of the order has been delivered by the company to the Corporate Affairs Commission for registration – section 539(4).

8.      A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the order has been made – section 539(4).

ARRANGEMENT ON SALE UNDER Section 538 CAMA

This section empowers the members of a company to resolve by special resolution, in order to achieve an arrangement, that the company be wound up and that the liquidator be appointed to sell the whole or part of the company’s undertaking or assets to another company.  The consideration for such sale may be cash, shares or debentures which the liquidator will distribute proportionately to the members in accordance with their rights in liquidation.

PROCEDURE FOR ARRANGEMENT ON SALE

1.      A twenty-one (21) days notice must be sent to members and the notice must state a special resolution pursuant to section 358.

2.      The members in general meeting must pass a special resolution to –

(a)    Wind up the company voluntarily

(b)   Appoint and authorise the liquidator to carry out the sale and distribution.

3.      The liquidator will give effect to the resolution.

4.      A dissenting member may by notice addressed to the liquidator and deposited at the registered office or head office of the company within thirty (30) days of the resolution into effect or to purchase his own shares at a price to be determined either by agreement in the case of a private company in which foreigners do not participate or by Securities and Exchange Commission in the case of a public company or private company in which foreigners participate.

5.      Any sale or distribution in pursuance of the special resolution shall be binding on the company and on all members except a member who signified his dissent accordingly – section 538(2) and (4).

6.      The sanction of court shall be required for the arrangement to be valid if –

(a)    Within one year from the date of passing any special resolution as required, an order is made under section 310 to section 312 for relief on the grounds of unfairly prejudicial and oppressive conduct; or

(b)   Within one year from the date of passing any resolution as required, an order is made for creditor’s voluntary winding up – section 358(2)(a).

EFFECT ON CREDITORS

The positions of creditors is that they remain creditors of the transferor company and they have all the rights against that company that their debts confer.

It will normally be part of the arrangement that the transferee company agrees to meet the liabilities of the transferor company and gives an indemnity to this effect or, alternatively that the transferor company retains sufficient assets to meet its liabilities.

Where a creditor feels that the arrangement is causing a variation or abrogation of his rights, he can pursue an order for creditors’ voluntary winding up.

EFFECT ON SHAREHOLDERS

The position of shareholders is that the resolution and the distribution that may follow it are valid but that any shareholder may in specific circumstances dissent and require to be bought out.

However, no dissentient shareholder can be compelled to take interest in the transferor company as long as he signifies his dissent according to the Act.

REGULATORY BODIES

Some regulatory bodies have a role to play with the regulation of corporate reconstructuring. They are –

1.      Companies and Allied Matters Act.

2.      Investment and Securities Act.

3.      Securities and Exchange Commission.

COMPANIES AND ALLIED MATTERS ACT

This makes changes in provisions in respect of changes in and affecting the rights and liabilities of members or creditors of the company, or affecting the regulations of the company.

INVESTMENT AND SECURITIES ACT

This makes provisions regulating schemes of changes and reconstruction affecting two or more companies and specifically, where there is to be a transfer of the property or undertaking of one company to another.

Look-up – schemes of arrangement; reconstruction; compromise; arrangement and compromise; mergers; takeovers.

SECURITIES AND EXCHANGE COMMISSION

It is charged with the functions of anti-trust regulation and monopolies control. It also has the function to review, approve and regulate all forms of business organisations.