Corporate Restructuring 1 (Internal Restructuring)
A company may be likened to an individual in the eyes of the law due to its juristic personality. Hence, when an individual is gravely ill, they would require medical assistance to restore their health. Companies may also find themselves in circumstances where they experience difficulties but do not wish to wind up (die). A dying company may explore the option of restructuring to remedy the issues it is faced with and remain afloat as a going concern.
Therefore, a company that is still viable and has its operations working fine may not necessarily have the need to restructure itself. Similarly, a human does not require the services of a medical practitioner where he/she is in good health.
The legal frameworks concerned with corporate restructuring include the Companies and Allied Matters Act 2020 (CAMA), Investments and Securities Act 2007 (ISA), Securities and Exchange Commission Rules 2013, Federal Consumers and Competition Protection Act 2018 (FCCPA), Federal High Court Act and the 1999 Constitution of the Federal Republic of Nigeria as amended. While the regulatory bodies include the Corporate Affairs Commission (CAC), Securities and Exchange Commission (SEC), Federal High Court of Nigeria, Nigerian Stock Exchange etc.
For the purpose of our discourse, we shall be examining internal options of corporate restructuring i.e. corporate restructuring alternatives that do not involve parties outside the company. These options include:
- Arrangement and compromise
- Arrangement on sale
- Management buyout and buy in
- Reduction in share capital
- Share reduction and consolidation
- Arrangement and Compromise:
This simply involves any change in rights or liabilities of members, debenture holders or creditors of the company. Arrangement and compromise must always be with the sanction of the Court (Federal High Court). For instance, a shareholder who is supposed to earn the sum of N100,000.00 in dividend, may be requested by the company to accept the sum of N50,000.00 and give back the remaining N50,000.00 to the company so it can reinvest and make profit. The implication is that the person has compromised his position which has affected his rights or liabilities.
Another instance of arrangement and compromise could be the company’s request of a preference shareholder to convert his shares into ordinary shares, so the company could remain viable. A company may also request the forgoing of part of debt owed to its creditors or conversion of part of creditors debts into shares in favour of the same creditors, all in a bid to protect and preserve the financial stability of the company.
For arrangement and compromise to be valid, it must be done with the sanction of the Court in order to ascertain that it is reasonable in itself.
Procedures for Arrangement and Compromise:
a. An application by the company to the Court which would order the convening of a meeting where a special resolution would be passed approving the scheme of arrangement and compromise.
b. An order of the Court referring the approved scheme of the arrangement and compromise to the Securities and Exchange Commission (SEC) to investigate its fairness and reasonableness.
c. Afterwards the SEC shall make a written report to the Court about the result of its investigation and if the Court is satisfied, the scheme is sanctioned and becomes binding on all parties involved.
2. Arrangement on sale
Arrangement on sale may take two forms:
a. Members voluntary winding up: This involves the members of the company at a general meeting, resolving via a special resolution that the company be subjected to members voluntary winding up. In this type of internal restructuring, there is no involvement of the Court albeit, there must be a “statutory declaration of solvency” which is to be made by the company’s directors that communicates to the CAC that the company can pay its debts up to 12 months from the point of winding up.
b. Creditors voluntary winding up: Here the creditors of the company apply to the Court for winding up of the company and there is also no requirement of declaration of solvency by the directors.
3. Management buyout and buy-in
This is a situation where the management of a company (Board of Directors) agrees to buyout the company in order to prevent its collapse. Nonetheless, it must be ascertained that the management was not in any manner involved in the decline of the company’s business which resulted in the intended buyout. Where the Court is unable to ascertain that the management was not responsible for the company’s state of decline, the buyout will not be sanctioned.
Management buy-in: is the direct opposite of management buyout, in the sense that the management of another company buys the assets of a distressed company to keep the said company viable. This may not be an internal means of restructuring due to the involvement of parties external to the company.
4. Reduction in share capital
This occurs when the assets of a company are no longer in alignment with its liabilities, such a company may reduce its assets to be in consonance with its liabilities. For instance, a company may have issued 1000 fully paid-up shares but if its net assets now represent a value of N750,000 the company may then reduce its share capital to reflect the true value of its assets.
5. Share reconstruction and consolidation
This occurs when the shares of a company are lumped together and either divided into a higher amount or divided into a lower amount. Albeit the shareholding value will not be affected.
For instance, the share capital of a company may be N1,000,000 divided into 500,000 ordinary shares of N2 each. In this scenario, the shares have been divided and lumped into higher amounts. The shares may also be divided and lumped into lower amounts for instance where the share capital of a company is N1,000, 000 and is divided into 2,000,000 ordinary shares of 50kobo each. Here the shareholding value is not affected.
Mr. A may own 100,000 ordinary shares of N1 each in company Z, this will be the reflection in his share certificate. In the event of a share reconstruction, Mr. A may be issued a new share certificate reflecting 50,000.00 ordinary shares at the value of N 2 each. The value of the said shares would still amount to N100,000.00. Inversely upon reconstruction, a new share certificate may be issued to Mr. A showing ownership of 200,000 ordinary shares at 50kobo each. The value of the shares would remain at N100,000.00.
In our next series, we shall be examining options of external corporate restructuring.