KNOWLEDGE BLOG
The legal world of restructurings
8 September 2023
Companies in the modern business world must constantly adapt and transform to remain relevant. One of the most powerful strategic moves by enterprises is corporate reorganizations and restructuring. However, these initiatives are not merely business decisions; they are infused with complex legal implications that require attention and understanding. In this knowledge blog, we delve deeper into the legal world of restructuring.
1. Mergers and Acquisitions: A Complex Legal Dance
Mergers and acquisitions (M&A) are among the most common types of restructuring. In a merger, two separate companies come together to form one new legal entity, while in an acquisition, one company acquires control of another company. However, these terms are often confused in the media. See also this article about the 'rescue' of Credit Suisse by UBS where this merger was called a takeover (by the Swiss government itself, no less).
When we talk about M&A within one group of companies, we are actually talking about a restructuring. The term restructuring implies that a move is made within the same company (group) in order to achieve a certain result. For example, the goal may be to work more efficiently or to prepare for a future transaction. The legal aspects of this are in-depth and include:
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Due Diligence: Before considering a merger or acquisition, a thorough due diligence is crucial. This goes beyond financial analysis; It involves understanding the legal status of the target company, including contracts, lawsuits, and regulatory compliance. This will ensure that you don't encounter any unpleasant surprises. This process identifies potential risks and can be crucial to a successful transaction. Also read this knowledge blog for more information on how to conduct a thorough due diligence investigation.
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Acquisition Agreements: The core of the restructuring consists of drafting sometimes complex and elaborate acquisition agreements that govern the terms of the transaction and the responsibilities of the parties. This is a process that will need to be led by an M&A lawyer who will keep an overview, warn you of potential risks and ensure that no legal matters are overlooked.
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Competition Law: Competition law may apply to the merger or acquisition. Make sure you comply with antitrust rules and get the approval of competition authorities so as not to restrict competition.
2. Restructuring: Times of Challenge
Sometimes companies find themselves in financial crisis and need to restructure in order to continue their operations. This can be done by entering into an agreement between creditors. However, in order to be able to bind these creditors to this, it is necessary that they agree to the proposed debt restructuring. If that does not work, it is also possible in the Netherlands to request a so-called homolagia (homologatie) of a private agreement (onderhands akkoord). If this composition is approved by the court, creditors are bound by it, even if they do not agree to it.
In the Netherlands this is a fairly new process, but in other countries (e.g. England) such a 'cramdown' of creditors has existed for a very long time. The idea behind this is that if the outcome of the composition is in favour of a creditor, this creditor should not reasonably be allowed to block the restructuring. By having a judge assess this, the company can be saved in these situations, while the creditors are also better off. These are complex processes with different legal aspects:
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Bankruptcy Law: A thorough knowledge of bankruptcy law, both domestic and foreign, is essential. This involves managing creditors' rights, debt restructuring, and the distribution of assets.
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Protection of Creditors and Shareholders: Safeguarding the rights of creditors and shareholders during restructuring is an ongoing theme. This is because the proposed plan is seen differently from the point of view of each creditor. It is difficult to take everyone into account, and then there are often creditors whose rights are overlooked. Good legal representation is therefore important in order to be alert to the changes and to protect creditors at all times.
- Liabilities: In the event of a restructuring, liabilities may arise for directors and supervisors within the company. Of course, a financial crisis can be caused by external factors, but this is not always self-evident. It is therefore important to identify potential liability risks and take the necessary measures to limit these risks. Directors' and officers' liability is also an area of law that is constantly changing. It is therefore a good idea to seek advice from a specialised lawyer, so that you are aware of the latest state of affairs.
- Taxes: Restructurings can also have tax implications, such as in the sale of assets and transfer of debt. It is important to be aware of the tax consequences of a business reorganisation and to seek tax advice in a timely manner. This prevents unnecessary taxes and creates more value from your company.
3. Contracts: legal beacons
In the event of a company reorganisation, existing contracts may be jeopardised or even terminated. This has consequences for business operations, but can also create a risk of lawsuits. It is therefore important to carefully review the terms of existing contracts and to take existing contractual obligations into account when drafting new contracts. Negotiations by an experienced lawyer can be of great value in this regard. The legal considerations here are numerous:
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Legal compliance: Ensure that all new contracts and agreements comply with applicable laws and regulations, both at the national and international levels. In international restructurings and mergers and acquisitions, companies must consider the complexity of several overlapping jurisdictions and regulations.
- Employment law: Company reorganisations and restructurings can lead to redundancies and changes in terms of employment. This can lead to liability risks and legal obligations towards the employees, such as a redundancy plan. It is therefore important to do good research on this in advance and to communicate clearly, so that the transition to a new structure can run smoothly.
- Intellectual Property: Intellectual property (IP) can be a central concern in corporate reorganizations, especially for tech companies and creative enterprises. IP includes patents, trademarks, copyrights, and other rights that protect a company's creative and innovative output. During a reorganisation, companies must ensure that their IP rights are safeguarded. This includes transferring IP rights according to applicable laws and agreements, revising licensing agreements, and protecting confidential information. For companies that rely on patents and technological innovation, it is necessary to review the validity and coverage of existing patents and ensure that any transfers or licenses are carried out seamlessly.
Conclusion: manage the process
The legal world of restructuring can sometimes be profound and complex. This knowledge blog provides only an introduction to this extensive topic, and the specific legal considerations can vary greatly depending on the nature of the corporate reorganization. It is an evolving field that requires attention in an ever-changing business environment. Understanding and managing the implications is important to minimize risk and achieve business objectives. Partnering with qualified legal professionals is a wise step to effectively manage these complex processes and ensure business success.
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