13 Oct Corporate Restructuring: Equity/Debt Finance or Winding Up
Many companies today face different financial challenges without understanding the available options to break, mitigate or overcome same, that is, Corporate Restructuring. Instead, they suffer the side effects of these challenges such as redundancy, uncontrollable increase in debt and winding up.
Corporate restructuring involves the reorganization of the legal, financial and operational structures of a company in order to reduce risks and maximize the company’s profit. Some methods of corporate restructuring include:
1. Equity Finance
2. Debt Finance
3. Voluntary winding up
Equity represents ownership of part of a company and gives rise to voting rights, dividends and so on. This is the easiest and least risk involving method of financial restructuring, which focuses more on the shareholding structure of the company. Some of the options available include;
a. Issue of Shares
This involves the offer of the company’s securities, such as shares, stock, bonds and other investment assets, either to the public or specific individuals (depending on the type of company).
b. Arrangement on sale
This occurs where the members of a company resolve for the company to be wound up and a liquidator appointed to sell all or part of the company’s undertakings or assets to another company. The consideration for the sale may be in form of shares and some equity rights in the purchasing company, which will be distributed to the members based on their liquidation rights. (Section 538 CAMA)
A company may arrange with its creditors and/or shareholders or a class of shareholders, to vary their rights in order to reduce the company’s financial obligations. This includes a member of the company accepting some additional amount/percentage of equity in that company in exchange for the cancellation of part or all of the debt he is being owed. (Section 539 CAMA).
d. Debt/Equity Swap
A company in debt may offer a certain predetermined percentage of its shares/equity to a third party or company in exchange for its debt orto meet its debt/equity ratio. The value of the swap is usually determined at the current market rate, although, the company may decide to offer a higher exchange value to entice share and debt holders to participate in the swap.
e. Mergers and Acquisition
A merger is the legal consolidation of two companies into one larger company/entity. This option is available to companies in financial crisis or looking to expand their business either through acquisition of technology or labour. They may be companies competing for the same market/consumers (horizontal merger)or providers of totally different services (vertical merger). It is important to note that the owners of the merging companies will remain the owners of the new entity.
Acquisition is the purchase of all or substantial interest in a company by another company. Here, one company acquires substantial shares in another company to the extent that the acquired company becomes its subsidiary or sub division.
This option allows for a bidder company to purchase substantial shares in a target company, thereby making it in charge of the target company’s operations, holdings and debts. Basically, an offer of purchase is being made to a target company in distress, which may cause the transfer of liabilities to the acquiring company, including financial obligations.
This is the reorganization of a company’s financial liabilities or obligations to a more feasible alternative. Debt Finance can be divided into two broad segments; Issuing Debt Securities and Taking out Loans, and they include some of the following:
A charge is created where a company borrows money from a financial institution or another company with some or all of its assets used as collateral. A charge may be Fixed or Floating and should be registered at the Corporate Affairs Commission (CAC) within 90 days of its creation. A Fixed charge includes tangible assets such as land, buildings, machinery, etc. copyright. While a Floating charge consists of assets that are intangible and subject to change in quantity and value, inter alia stock, shares etc.
b. Bank Loan or Term Loan Facility
Companies can borrow funds from financial institutions which may be backed with collateral/security. The short coming here is that although the loan term is usually considered, under normal conditions the interest rate on repayment is usually high in some instances.
This is a credit facility granted by a bank to an applicant who must have an existing account with the bank. It is usually granted on the credibility of the applicant, with or without collateral. This option however might not be viable as there is typically a withdrawal limit on the overdraft granted.
d. Corporate Bonds
This is a debt investment whereby investors loan money to an entity for an agreed period of time with a fixed or variable interest rate in exchange for bonds. Bonds are habitually issued by companies to refinance existing debt obligations and finance partial capital expenditure plans or long term projects.
These are debt instruments issued by a company to borrow money at a fixed interest rate. The instrument stands as an acknowledgement of the company’s indebtedness to the holder or registered holder. Debentures do not require collateral to be executed and they may be in form of a Simple Debenture or a Debenture Trust Deed. The Simple Debenture is used when the company takes a loan from another company or from a bank while the Trust Deed applies where the debentures are being offered to the public.
VOLUNTARY WINDING UP
A company which is in distress and has exhausted all options available can resort to winding up its operations voluntarily. Voluntary winding up can only take place in any of the following circumstances: (section 457 CAMA)
i. Where the fixed term set out in the Articles of Association for the running of the business has expired;
ii. Where an event occurs upon which the Articles of Association of the company provides that the company be dissolved;
iii. Where the company resolves by Special resolution to be wound up.
Summarily, the Winding up procedure is as follows:
i. The directors at a Board meeting must make a statutory declaration of solvency to the effect that the company is able to pay its debts within 12 months of commencement of the winding up process.
ii. The members of the company must pass a special resolution approving the winding up process and appoint a liquidator for same.
iii. Filing of notice of the resolutions and acceptance letter from the Liquidator accepting his appointment are to be filed and advertised.
iv. Once the affairs of the company are fully wound up, the liquidator must prepare an account of the winding up and present the final accounts of the company to the members.
v. Final filings at the Corporate Affairs Commission (CAC) and Federal Inland revenue Service (FIRS).
On the expiration of 3months after the filings, the company is deemed to be dissolved.
Berkeley legal has the requisite expertise to proffer optimal financial restructuring advice, and as such is in a position to provide services such as drafting, engagement of necessary third party professionals, interfacing and regularization in any of the above structures.