A company reorganisation can happen in a number of ways:
- by agreement
- by a scheme of arrangement
- by way of a section 110 Insolvency Act 1986 de-merger
- by merging with another business or by dividing up the business
All company reorganisations need to be planned and the giveaway in the title is that they need to be run in an organised manner. Most reorganisation will require the consent of shareholders, the bank and other third parties, such as creditors, the landlord or the main supplier (depending on this business) together with dealing with the transfer of employees.
As legal advisors to business, we are able to advise companies as to the effect of preventing a transaction at undervalue or a situation whereby the transaction could be viewed as defrauding creditors. Liquidators of the company left behind following a re-organisation can look to take action to trace the assets back if they did not consent to the reorganisation.
Reorganisation by agreement
Where a dissenting shareholder or creditor blocks a reorganisation by agreement, if the shareholders of at least 75% of the shares are in favour of the reorganisation they can use a procedure known as a section 110 de-merger. As commercial solicitors, we are experienced in dealing with the intricate details and timetable of a section 110 de-merger and are able to liaise with your accountant, bank and other third parties together with drafting the necessary Reconstruction Agreement and shareholder and board resolutions. Where land and buildings are involved, our commercial property solicitors are happy to provide legal advice and prepare the necessary documentation to effect the transfer. As the section 110 de-merger is part of an insolvency scheme, it will involve the appointment of a liquidator who will be responsible for liquidating the original company.
Section 110 de-merger
A de-merger is a way of dividing up the business of a company between its shareholders, but a section 110 de-merger is not always the most appropriate way of carrying this out. Being business solicitors we are aware of the drawbacks in using the section 110 route: namely, that by doing so the sale consideration has to be paid out in accordance with the rights attached to the shares. Therefore, if you have four brothers who wish to divide up their father’s family business into four separate companies; if one brother has priority for dividends he will receive any sale consideration in priority to his three brothers which may render the division un-equal. For this reason, companies may prefer to use a route known as a scheme of arrangement under part 26 of the Companies Act 2006. A scheme of arrangement requires at least 75% of shareholder or creditor approval and must be sanctioned by the court.