The implementation of any legal entity rationalisation programme will involve careful consideration of tax, accountancy and legal issues. In terms of legal issues, what should you watch out for?
Intra-group transactions are commonly undertaken for a purchase price which is not equal to the market value of the assets concerned. This raises the question as to whether such a transaction constitutes a distribution in kind and whether the transferring company therefore needs to have sufficient distributable profits to carry out the transaction.
Where a transferring company has profits available for distribution, when it transfers a non-cash asset to a parent company or fellow subsidiary the amount of the distribution arising will be:
- zero, if the consideration received is equal to or exceeds the book value of the assets; or
- the amount by which the book value exceeds the consideration.
- Availability of distributable profits
In view of the rules relating to distributions in kind (see above), it may be necessary to restructure the balance sheet of the transferring company, in order to ‘create’ sufficient distributable profits to facilitate an intra-group transfer of assets. It is possible to reduce the share capital and other non-distributable reserves of the company and transfer the amount arising on such reduction to the company’s profit and loss account. This requires the directors of the company to make a formal declaration of solvency regarding the company’s immediate position and over the next 12 months.
It is possible that third parties may need to be approached to give their approval to a transfer of assets. This could be relevant in the case of assets owned though a joint venture with a third party. Also, assets which have been given as security under a banking facility may require the consent of the bank to be transferred from one group company to another. It may be necessary to obtain approval from a regulator where the business concerned operates in a regulated market, such as financial services, or one where a licence is needed in order to operate.
An intra-group transfer of a business might trigger a transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (otherwise known as ‘TUPE’). If TUPE applies, the employees of the transferring company will transfer, on their existing terms, to the transferee company. The parties will be under obligations to inform, and in some circumstances consult with, the employees in advance of any such transfer.
If the transferring company participates in a defined benefit pension scheme, the company may need to consult with the scheme’s trustees to explain what impact the transfer might have on the scheme, taking into account the financial covenant strength of the new employer company.
Where the transferor and transferee companies are incorporated in different EU Member States, it may be possible to effect the business transfer by way of a merger in accordance with the EU Cross-border Mergers Directive.