Robin Johnson, Christian Mense and Nicola Evans continue their series of papers on corporate reorganisations. In this article, they look at the key considerations on a multinational reorganisation project.
Change is the new norm, and each month, if not weekly, companies are contemplating how to transform their current business set-ups to create efficiencies, maximise use of invested capital, simplify corporate structures and entity management, or improve fiscal and regulatory compliance. For a multinational business, these often large-scale, time and management consuming projects can seem daunting prospects. In most cases, however, there are always some common key considerations to be aware of and which should be reviewed as a priority matter. These are identified with a brief outline summary below.
Customer and supplier contracts
When reorganising a corporate group structure, a business will need to identify if it has any key customer and/or supplier contracts in place that contain change of control or assignment or novation provisions. It would not want to risk negatively triggering such a clause and giving cause to terminate the contract if the relevant customer/supplier is aggrieved – or looking for an easy option to exit the agreement. Do you need to get a notification or consent from a particular customer or supplier in order to achieve the planned reorganisation? If the business has hundreds or even thousands of individual contracts, a materiality threshold will need to be considered. Will only the top ten customers and suppliers in a territory be considered for notification/consent purposes on a change of control, or for assignment or novation purposes? Are there any customers/suppliers not in that material group that should otherwise be considered as part of the group of contracts to be reviewed and dealt with? Close liaison with the key stakeholders in the business should identify these contracts and whether, practically speaking, discussions should be held with the relevant customers/suppliers at an early stage.
Where the volume of contracts for any particular business is particularly daunting, it is possible that AI could be applied to contracts to identify relevant change of control, assignment or novation clauses in an efficient manner. This is something that we are now seeing used successfully on many projects and can be worth exploring to take the burden away from in-house teams and local business managers enabling them to continue their primary focus on their day job. Control management is often found lacking on reorganisations and becomes a must going forward.
Property and leases
In a similar vein to customer and supplier contracts, it is possible that leases for properties in certain territories may have change of control, assignment or novation provisions embedded in them. Consideration should be given to the approach to be taken with landlords and whether early discussions are required. Hopefully an intra-group transfer would give less cause for concern (if any) than a transfer of entities to a third party who may be unknown to a current landlord of the business. Local operating permits also need reviewing.
Employment
Works council or trade union representative body considerations may also need to be taken into account when planning changes to the group structure and should be another item for early consideration due to the often prescriptive nature of the timetables associated with consultation requirements. Where it is not a strict requirement to consult with such bodies (usually if no ‘measures’ are to be taken – eg redundancies), it may still be advisable to notify and inform in order to maintain good working relations with them. The Netherlands and France are examples of two jurisdictions where such considerations are often required, while a business with a larger European presence may also need to consider European Works Council consultations. Keeping the workforce informed of plans may also practically be advisable in order to avoid unsettling rumour mills or miscommunications abounding. Over-communicating reorganisations and setting up ‘town hall’ meetings to listen to employees often works well.
Licensing and regulation
If a business has regulatory requirements to consider, this is something that should be very high up the agenda when looking at implementing a reorganisation in the group. It is usually the case that early engagement with regulators about plans is advisable so there are no nasty surprises or delays to the proposed timetable. Regulations, especially in countries in LATAM and India and China, can dictate the timetable on any reorganisation.
For global organisations, key stakeholders in the local businesses often do have strong relationships with their local regulators and will know best how to engage with them in a productive way. Where, under certain regimes, a business may currently be in compliance with law through grandfathering provisions (ie where changes have been made to local laws that would need to have been effected if a new business applied for a licence, but have been effectively waived for a continuing business that originally complied), careful consideration should be made as to whether the reorganisational changes proposed would cause the grandfathering to fall away and new applications to the regulator to be made. In these circumstances, an analysis will be required as to the benefits versus the pitfalls of doing the reorganisation in that territory and whether it may be structured slightly differently in order to avoid any new, lengthy and costly reapplications to a regulator being made. This can often dictate which company will survive and which will become the ‘new entity’.
Third-party shareholder arrangements
It is not unusual (and in some cases, due to local law requirements, is essential) for a global business to operate in certain jurisdictions together with third-party local stakeholders and partners. These shareholder arrangements may need to be considered carefully when seeking to restructure the group. This is particularly the case where there is a local ‘sponsor’, for example in the Middle East and Asia.
Shareholders’ agreements may be in place with the local partners and these may contain change of control provisions. Changes to the corporate group structure could also give rise to put/call options being triggered and so care must be taken so as not to trigger any unwanted provisions unwittingly through the proposed plans. On top of that, there are still a number of jurisdictions where local law requires there to be more than one shareholder of an entity, and this can be challenging in group structures.
Depending on the strength of relationships with local partners, early discussions may again be advisable. A strategy for getting the local stakeholders on-side with the proposals should be agreed early as it is best to avoid situations where relationships can become strained or the third party shareholders see the reorganisation as an opportunity to ask for something in return for their consent and approval (if required), particularly if it is money! Such arrangements often extend to agency and distribution agreements.
IT, IP and data
Last but not least, there are always operational considerations to take into account when looking to restructure your group. Care should be taken to make sure that the reorganisation does not give rise to issues as regards, for example, the operation of the group’s IT systems, and licensing arrangements for software may also need to be reviewed. The restructure may mean that IP licences also need to be amended or granted so that the correct group entities can validly use (or grant the use of ) IP rights. Many software licences contain provisions which mean payments will need to be made on a reorganisation. In addition, data sharing arrangements may also need to be looked at to ensure that they continue to work effectively and in compliance with laws, not least in the context of the latest GDPR requirements. Where shared IP or IT is required, robust new watertight transfer pricing licences need to be put in place.
Top tips for dealing with the key considerations
Our top tips for addressing the key considerations outlined above are:
- Engage with third party stakeholders early: customers, suppliers, landlords, regulators and third party shareholders may prefer to work to their own timetable rather than yours! This might give leverage where you clearly don’t want it.
- Liaise closely with your tax structuring advisers; there may be an alternative solution to the structuring that can avoid difficult legal issues such as licensing changes. All-hands update calls are essential.
- Carefully consider information flow to your business so as to avoid any miscommunications and unsettling rumours. Think of ‘town hall’ sessions.
- Build in time to your timeline in order to plan your strategy and take into account any bumps in the road along the way.
- It is useful to have one key contact who owns the project, while a dedicated project management team using AI tools to plan the timetable and required steps is essential. You often need more than one project manager; in fact, assume you need several from a budgeting point of view.