CORPORATE RESTRUCTURING Flashcards
What is corporate restructuring?
Process of redesigning/ reorganising the :
- Legal
- Ownership
- Operational
or other structures of a company for the purpose of making it more profitable or better equipped for its present needs
It may be done by: Internal or External restructuring
When is internal restructuring used?
When a company is facing economic hardship, or at a time when the company’s liabilities far outweigh its assets
objective: is to guarantee the survival of the company
Who is involved in internal restructuring?
It involves only the company, the management, members and creditors of the company
List the different forms of internal restructuring
- Share reconstruction/consolidation
- Reduction in share capital
- Arrangement and Compromise
- Arrangement on Sale
- Management buy out
- Management buy in
What is a share reconstruction/consolidation
The alteration of a company's share capital It may be done by: 1.consolidation 2. conversion 3. cancellation 4. Subdivision
What is consolidation of shares?
- A company combines all of its share capital
2. Divides it into shares of larger amount than its existing shares, thus increasing the nominal value of each share
What happens to the shares after consolidation?
The number of shares held by each shareholder is lesser than what was previously held
However, the percentage ownership and value of investment remain the same
What is conversion?
A company converts all or any of its paid-up shares into stock and re-converts that stock into paid up shares of any denomination
What is cancellation?
Cancellation is where a company cancel shares which have not been taken or agreed to be taken by any person
What is subdivision?
Subdivision is where a company splits its shares into two or more new shares
Without affecting the voting control and right to dividend of individual shareholders
It is the opposite of consolidation of shares
When is subdivision done?
To improve liquidity in the company’s shares
What is reduction in share capital?
This is where a company reduces its share capital in order to reduce liability on any unpaid share, or accumulated losses.
What is the difference between reduction of share capital and cancellation of shares?
Reduction of share capital affects a company’s issued shares, whether paid or unpaid.
Cancellation affects the unissued shares of a company
What is arrangement and compromise?
An arrangement between a company and its creditors and/or shareholders Or A class of them to accept less than what they are ordinarily entitled to as full satisfaction of the debt that the company is obligated to pay them
When is arrangement and compromise the preferred option?1
Where a company is insolvent and unable to meet its financial obligations to its creditors and shareholders, but it is desired that the company remain afloat
What may be involved in an arrangement and compromise?
It may involve a debt-equity swap whereby the company negotiates with its creditors to take shares in the company as satisfaction of the debt held by the creditors.
What else could be involved in an arrangement and compromise?
It may also involve a negotiation between the company and holders of preference shares regarding variation of certain rights, such as the cancellation of dividend arrears
What is the procedure for arrangement and compromise?
- Board passes resolution sanctioning scheme of arrangement
- An application is made to the court to direct the calling of a meeting of its creditors/members
- Notice of meeting is served on members accompanied with a statement showing the effect of the arrangement on the directors as creditors/shareholders
- At the meeting 3/4 majority of the shareholders/creditors shall vote in favour of the scheme and a written report of it shall be made to the court
- The Federal High Court refers the scheme to the SEC o investigate its fairness and report back to the court
- The SEC appoints investigators to investigate the scheme and reports to the court
- If satisfied, the court will make an order sanctioning the scheme becomes binding on all affected creditors/shareholders
- File a CTC of the court order sanctioning the scheme with the SEC and the CAC within 7 days of the grant
- A copy of the court order shall be annexed to the memorandum of the company
What is an arrangement on sale?
This is the process of voluntarily winding up a company and having a liquidator appointed and authorised to sell the whole or part of its undertaking or assets to another corporate body
Consideration for the sale may be cash, shares, debentures or policies which would be distributed in species amongst the members of the companies in accordance with their rights in liquidation
What is management buy-out?
This is where the management team of a company acquires the controlling shares of that company or its subsidiaries
What is management buy-in?
This is just the same as management buy-out, except that in this case, an external management team acquires the controlling shares in a company
What are the external restructuring options:
i. Mergers and Acquisition
ii. Take-over
iii. Purchase and Assumption
iv. Cherry Picking
What are the various forms of mergers?
- Horizontal
- Vertical
- Conglomerate
What is a horizontal merger?
It is a merger between two or more entities who engage in a similar kind of business e.g. a merger between two banks
What is a vertical merger?
Is a merger between two or more entities who engage in different but complimentary businesses e.g. a merger between a cement factory and a sack producer
What is a conglomerate merger?
It is a merger between two or more entities in unrelated business activities
What are the three types of mergers?
- Small merger
- Intermediate merger
- Large merger
What section of the SEC prescribes the new thresholds of categorising mergers?
Rule 427 of the SEC Rules
What is a small merger?
A merger where the combined assets or turnover of merging entities is less than N1 billion
What is an intermediate merger?
Is a merger where the combined assets or turnover of merging entities is between N1billion - N5billion
What is a large merger?
A merger where the combined assets or turnover of merging entities is above N5 billion
What is the procedure for a small merger?
- Parties do not need to give notification to the SEC, except if the SEC requires notification
- Where notification to the SEC is required, within 20 working days of giving notification the SEC
- may extend the period in which it has to consider the proposed merger by a single period not exceeding 40 working days, or
- After considering the merger, shall notify the parties in the prescribed form of its approval, its conditional approval, or its prohibition of the merger
iii. The SEC shall;
- publish a notice of its decision in the gazette; and
- Issue written reasons for the decision if it prohibits or conditionally approves the merger
iv. If the merger is approved, the parties shall apply to the court for the merger to be sanctioned, and when sanctioned, it becomes binding on the companies
What is the procedure for obtaining approval for large and intermediate merger?
4 stages in the process are as follows;
i. File pre-merger notification with SEC for evaluation
ii. File an application in the Federal High Court seeking an order to convene a court ordered meeting
iii. Following the resolution of the shareholders at the court ordered meeting, the applicants shall file with the commission a formal application for approval of the merger
iv. Comply with the post-approval requirements
What is the procedure for large and intermediate merger?
- Preparation of merger scheme document
- File merger scheme document with SEC for pre-notification and obtain a letter of ‘no objection’
- Apply to the Federal High Court to convene meeting of the shareholders of the respective companies
- Special resolution is passed at the respective meetings approving the merger of the companies
- File a copy of the special resolution with the CAC
- Make formal application to SEC to proceed with merger
- SEC will send a response between 20-40 working days either approving the merger wholly, or granting conditional approval, or refusing to grant approval
- File SEC approval with CAC
- SEC informs the FHC of the approval of the merger
- Federal High Court sanctions the merger
- File a CTC of the court order sanctioning the merger with CAC within 15 days, and SEC within 7 days
- SEC conducts post-merger investigation within 3 months of the court order
- Notice of merger is registered with the CAC
What is a Take-Over?
The acquisition of substantial interest ( not less than 30% but not more than 51%) by an individual or company ( the acquirer) in another company ( the target company) sufficient enough to give the acquiring company control of that other company
How is a take-over different from a merger?
In the sense that the company taken over remains in existence but as a subsidiary of the acquiring company
Can any type of company be taken over?
A take-over can only be made to a public quoted company that has at least 20 members
Define an ‘offeror/ acquiring company’
This is the person or corporate body making the take-over bid
Define an ‘ offeree/target company’
This is the company whose shares or assets are subject to a take over bid
Define a ‘bid’
Is the invitation or offer made to take-over a company
Define a ‘dispatch’
This is the process of communicating an offer to acquire shares in another company
What is a purchase and assumption?
This is a restructuring option which is aimed at reviving a moribound or failing company.
Here, the investor purchases the assets of the failing company and assumes its liabilities
What is cherry picking?
This restructuring option is similar to purchase and assumption
Differs in the sense that the investor here selects choice assets from a failing company, to purchase and integrate into his own operations
