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As a business owner, you may have heard the term ‘group reorganisation’. Group reorganisation is a broad term that describes anything from transferring certain group assets from one group company to another, to completely restructuring the company’s ownership. This article will explain a group reorganisation from a business perspective and then consider some of the legal implications for group reorganisation.
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Overview
Group Companies
Before explaining the tax implications of intra-group transfers, it is essential to clarify what group companies or business groups are. Generally, a reference to a group company or business group refers to a business made up of two or more individual companies, and the same shareholders usually own these companies.
Many medium to large-sized businesses operate group structures because they allow the business to limit liabilities to particular companies. As each company is its own legal entity and benefits from the concept of limited liability, ordinarily, no one group company is responsible for the obligations of the others.
Example: BrewCo Beer
For this article, imagine you are the main shareholder and one of the directors of BrewCo Beer.
As the company has grown, it has also built a distribution business and a retail operation. It also owns several parcels of land throughout the UK, and BrewCo Retail Ltd’s storefronts are leased from BrewCo Land. Recently, BrewCo expanded its business to the continent, operating through a Dutch subsidiary called BrewCo Euro B.V.
Below is a chart that represents a basic group structure.
Intra-Group Asset Transfers
As group reorganisation is a broad term, there are different implications of group reorganisation. It generally describes intra-group transfers of substantial business assets, where one group company transfers an asset to another. Commonly transferred assets include:
- shares in a subsidiary company;
- tangible property, including inventory and land;
- intangible property like intellectual property rights; and
- debts owed by a third party (called receivables).
Intra-group transfers usually take place for one of three reasons:
- to allow one group company to benefit from an asset directly held by another;
- to sell part or all of the business to a third party; or
- to prepare for a financial restructuring of a company’s debt.
For One Company’s Benefit
Consider that BrewCo Retailer is the company that operates the group’s retail business, so it does not brew the beer that it sells. Instead, BrewCo Beer Ltd does this, which owns all the brewing equipment to make the business’s beer. Because these are two distinct companies, BrewCo Beer Ltd must transfer the beer to BrewCo Retailer Ltd.
A more substantial example of an intra-group transfer in the case of reason one above is when a business group needs a loan from the bank. The group company borrowing the money may not have assets of sufficient value that the bank can use as security. The group may move valuable business assets to the borrowing company to get around this.
In Preparation for a Business Sale
Imagine a larger retailer looking to acquire just the retail division of BrewCo Beer. One of the conditions is that they get to keep using your brand so that to the outside world, BrewCo Beer Retail Stores still appear owned by the group.
BrewCo Retailer Ltd owns the intellectual property rights to the entire group brand for various marketing purposes. Therefore, to ensure the brand remains with the group and is not sold to the buyer, BrewCo Retailer would need to transfer the branding rights to another group company.
For a Restructuring
Restructuring refers to any agreement between a company and its creditors to change the terms of its debt, usually due to financial difficulties. It is a complex area of law, but a simple example is if BrewCo runs into problems and cannot pay its debts. An investor is willing to pay off the debt but wants half of the equity in the business and the cash proceeds from selling off the distribution side of the business.
Like the business sale, you might need to move assets around to facilitate the disposal of BrewCo’s distribution business.
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Legal Implications
Below are some implications of group reorganisation.
Directors’ Duties
All companies, including yours, must have at least one director. This director owes the company-specific duties and, in a group company scenario, will owe them to their individual company rather than the whole group.
However, you may serve as the director for each group company. Nonetheless, the law says that any group transfer must promote the company’s success for the benefit of that company’s shareholders. You cannot sacrifice the interests of one group company for the other shareholders.
For instance, if you transfer the beer brewed by BrewCo Beer Ltd to BrewCo Retailer Ltd at a discount, you could technically breach your duties to BrewCo Beer Ltd. In practice, this is not a problem where the ultimate owner of the group is the same for all the group companies (as is the case for BrewCo).
Distributions in Kind
Distribution in kind is any dividend not issued in cash. The law may see this as a distribution if you transfer an asset from a subsidiary to a parent company at an undervalue. If the subsidiary does not have sufficient profits, then it is unlawful. This can pose problems, particularly if you are a subsidiary and parent company director and intend to sell the company later. This is because the law can obligate the members to repay the unlawful distribution upon request in certain circumstances.
Tax Implications
The law treats any transfer from one group company to another as a transfer to a third party. However, there are exceptions to certain kinds of groups based on the portion of ownership in the subsidiary as being:
- 51% subsidiary;
- 75% subsidiary; or
- 90% subsidiary.
Therefore, how you structure your group company can maximise the most efficient tax offerings available to your business.
Key Takeaways
A group reorganisation generally refers to intra-company asset transfers from one group company to another. Businesses like yours might wish to make intra-company transfers for a few reasons, including out of business necessity so that one group company can make use of a business asset. Other reasons include in preparation for an asset sale or a restructuring. Because each company within a business group is its own legal entity, intra-group transfers can create legal hurdles, so implications for group reorganisation. In particular, the duties each group company director owes to the company can conflict with the wider group. There are also complex tax issues that can arise.
If you need help with group reorganisation, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A group reorganisation can refer to many different things, but generally, it is where one group company transfers assets to another for some purpose.
The two main legal issues relate to conflicting director duties and tax implications. This is because, even though the companies are part of the same business group, the law treats them primarily as their own separate legal persons.
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