Every company is regarded as a separate legal entity, distinct from its owners and founders. Once a company is incorporated it can do whatever a human can do, from interacting with its environment, expanding, and most of all surviving.
A major way companies employ for survival is by restructuring. Restructuring is a mechanism of change in the existing structure of a company to allow it to deal with issues affecting its business. Company restructuring could either be internal or external depending, this work seeks to detail the various internal restructuring options available to companies.
Internal restructuring options for companies
The basic aim of internal corporate restructuring is to allow the company to remain in existence at all costs. The major focus of internal restructuring is on the survival and maintenance of the company. For instance, a company can be going through difficulty and is about to be wound up, instead of winding up the business, the company can opt for an internal restructuring mechanism to salvage the problem. Below are the available internal restructuring options for corporations in Nigeria.
1. Consolidation of shares
Companies can consolidate their shares to avoid an issue that could lead the corporation to wind up in the future. The shares are the assets the company trade to shareholders in exchange for capital investments. When a company consolidate its shares, this means that the company accumulates its total share capital and divides the share capital for greater amounts payable.
For instance, if a company’s total shares are one million shares at 2 Naira each, the company consolidating its shares will have a share capital of 500,000 shares at 4 Naira each. This technique allows the company to sell additional shares swiftly at the same cost.
2. Subdivision of shares
Unlike consolidation, the subdivision of shares sees the company dividing its shares into smaller amounts. For instance, a company with 1 million shares at 2 Naira each can subdivide the shares into 2 million at 1 Naira each.
This allows for the company’s shares to be cheaper and sold quicker in the market while still maintaining the actual revenue made from the company’s shareholders.
3. Increasing share capital
This is one of the major ways of internal restructuring done by companies all over the world. The share capital of a company can be increased to raise additional funds for the company to salvage a problem; this is a classic form of internal restructuring.
For instance, if XYZ Ltd owed ABX Ltd 2 million Naira, the company can increase and issue additional share capital to have the loan paid up. To increase the share capital, the general meeting of the company would pass a special resolution for its increase.
4. Reducing share capital
Companies can opt to have their share capital reduced. This seems unlikely but is possible in practice. Companies reduce their shares for varying reasons, one of which is to buy back their shares from the shareholders and sell them at an added cost to other investors. Another reason is to pay lesser dividends to shareholders in the company, especially when the company is in a bubble or doesn’t make much revenue.
When reducing a company’s share capital, a special resolution is required by the general meeting of the company. Also, the reduction must be carried on with the permission of the Federal High Court.
5. Conversion of debts to shares
Most often than expected, companies acquire loans from investors, banks, corporations or high net-worth individuals. These loans come with interest that accumulates as the principal loan remains in force. To salvage the company’s creditors from initiating the creditors winding up process, companies most often negotiate with creditors to have their debt converted to shares in the company.
This action grants the company’s creditor ownership rights in the company and closes the debt relationship between the parties.
6. Arrangement on sale
An arrangement on sale occurs when a company makes any change in the liability rights of its members, creditors or debenture holders. In an arrangement on sale, a company by special resolution appoints a liquidator to wind up the company and transfer the company shares to another company, which would pay for the shares wholly, and the sum paid would be distributed among the members following their ownership rights.
In the arrangement on sale, the company is still in operation and undergoing business, all that was changed is the ownership structure of the company.
7. Arrangement and compromise
Under the arrangement and compromise a company gets winded up by the court and the liquidator enters into a compromise with the company’s debenture holders and creditors. The company’s creditor must make a compromise as to their rights and liabilities to have an effective conclusion of the debt being owed.
For an arrangement and compromise to be done, the company must get a court order for the scheme, the court must ensure that the overall scheme is fair and would not be prejudicial to the interest of the creditors or debenture holders generally.
8. Management buy-out
As the name implies, the management buy-out occurs when the management of the company (the directors and other persons in the management) buys out the ownership stake in the company from the shareholders. Mostly, the company’s management buyout can cause a conflict of interests following that the company’s shareholders are supposed to be served by the management team, at the management buyout this duty is fused.
The Securities and Exchange Commission (SEC) regulates the management buyout in Nigeria. The SEC must approve the buyout before it becomes effective.
Companies strive to remain in existence and have their business running, any action that places the company intact but changes the shareholding structure in the company is an internal restructuring mechanism.
The change follows laid down procedures provided by the Companies and Allied Matters Act (CAMA) and must specifically seek to have the company’s interests protected. This article listed eight internal restructuring mechanisms to employ for the continuity of the company.