Module 4 - Dimensions of Corporate Restructuring Module Outlines © Corporate Restructuring including buy-back of shares, & Divestiture 9 Financial Restructuring @ Alliances & Joint Ventures Employee Stock Ownership @ Leveraged Buyouts @ Cross-Border Merger and Acquisitions @ De-Merger 9 Delisting of Securities Corporate Restructuring including buy-back of shares, & Divestiture Buy Back of Shares - Section 77A It is prohibited for a company limited by shares to buy its own shares because doing so would result in an unlawful capital reduction. A business may "buy-back" its own shares or certain other securities usingDits free reserves; or Othe Securities Premium Account @ Any share or other specified security proceeds No firm may acquire its own shares or other specific securities unless the buy-back is permitted by its bylaws and a special resolution permitting the buy-back has been approved by the company's general meeting. Objective of Buy - Back The reasons for buy- back may be one or more of the following: 1. To improve earnings per share 2. To improve retum on capital, return on net worth and to enhance the long term shareholder value3. To provide an additional exit route to shareholders when shares are under valued or are thinly traded 4, To enhance consolidation of stake in the company 5. To prevent unwelcome takeover bids 6. To return surplus cash to shareholders 7. To achieve optimum capital structure 8. To support share price during periods of sluggish market conditions 9. To service the equity more efficiently. Authority and Quantum of Buy back of Securities 1. Authority in the Articles — The Articles of Association should have a Section 77A authorization for stock buybacks (2). (A) 2. Board resolution and quantum of buy back — The Board may, by resolution, permit the repurchase of securities not to exceed 10% of the Company's total paid-up equity capital and free reserves. Article 7A (2) 3. Shareholders’ resolution and quantum of buy — back — By adopting a special resolution, the buyback of securities must be equal to or less than 25% of the company's total paid-up capital and free reserves. Article 77A (2)(b) (c) 4, Maximum Quantum of buy back — More than 25% of a company’s total paid-up capital plus free reserves cannot be repurchased. Article 7A (2) (c) 5. Further offer of buyback - In the three hundred and sixty-five days following the date of the previous buy-back offer, if any, no buy-back offer may be made. Section 77A's second caveat (2)Conditions to be fulfilled and obligations for Buy back of Securities 1. Section 77A only permits the purchase of fully paid up securities (2). (e). Even if they are trading below par on the stock exchange, fully paid up securities are eligible for buyback 2. According to Section 77A (2), the company's debt-to-equity ratio shouldn't be more than 2:1 after the buyback (d) 3. When shares are repurchased using free reserves, the business must transfer to the capital redemption reserve account [Section 80(1)(d)] an amount equivalent to the nominal value of the shares repurchased, and Section 77AA requires that the balance sheet include information on the transfer. 4. After a company completes a buyback of its shares or other specified securities under this section, it is prohibited from issuing the same type of shares, including additional shares under section 81(1)(a), or other specified securities for a period of six months, unless it is a bonus issue or in order to fulfil ongoing obligations, such as the conversion of warrants, stock option plans, sweat equity, preference shares, or debentures. Article 7A (8) 5. No securities shall be repurchased while a petition for amalgamation is still being considered. 6. Prior to the buyback offer's conclusion, no securities, including bonus shares, should be issued. While the repurchase offer is active, promoters or anyone working jointly should not trade in the company's securities.Restriction on Buy back 1. R According to Section 77B(1), a company should not buy back its securities if there is a default in the repayment of deposits or interest due thereon, the redemption of debentures or preference shares, the repayment of any term loans, or the repayment of any interest owed to financial institutions (C) . Section 77B states that a firm should not be allowed to buy back shares if it has failed to properly prepare and file its annual return (2) . According to Section 77B, buybacks should not be conducted in the case of any dividend payment defaults to equity or preference shareholders (2) ‘According to Section 7B, buybacks shall not be conducted if annual accounts are not prepared on time (2) According to Section 77B(1)(a), no buybacks should be performed through any subsidiary firms, including their own, or through any investment companies or groups of investment organisations (b) Declaration of Solvency — Section 77A (6 When a company passes a special resolution or the Board passes a resolution under the first proviso to clause (b) of Section 77A authorising the purchase of its own shares, the company must first file with the Registrar and the Securities and Exchange Board of India a declaration ofsolvency in the form that may be prescribed, verified by an affidavit stating that the Board has conducted a thorough investigation into the company's affairs as a result of which they have reached this conclusion by at least two directors of the company, one of whom shall be the managing director. Income Tax Aspects When a shareholder or holder of other specified securities, as defined in section 77A of the Companies Act of 1956, receives any consideration from a company for the purchase of its own shares or other specified securities held by the shareholder or holder of other specified securities, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration reverts to the shareholder or holder of other specified securities or other specified securities were purchased by the company. Methods of Buy back The buy-back under sub-section (1) may be (a) proportionately, from the holders of current securities; (b) or from a public market (c) from “odd lots," which is to say “from securities of a public firm whose shares are listed on a recognised stock exchange" when the lot of those securities is less than the "marketable lot," as the stock exchange may specify; or (d) by purchasing the securities that were given to company employees as part of a stock option or sweat equity programme.What is a Divestiture? When a company sells a business unit's assets in full or in part, together with the segment's assets, this is known as a divestiture. Divestiture Corporate Strategy Divestitures in M&A are when a company sells a collection of assets or an entire business division. Generally, the strategic rationale of divestitures include: Non-Core Part of Business Operations Misalignment with Long-Term Corporate Strategy Liquidity Shortfall and Urgent Need for Cash Activist Investor Pressure Anti-Trust Regulatory Pressure Operational Restructuring When management decides to sell an asset or business division, it usually does so because they believe the division does not add enough value to the company's main business.Theoretically, businesses should only sell or manage a business division as a separate corporation if it is out of alignment with their primary strategy or if the assets would be more valuable if retained. For instance, a company division can be seen as unnecessary, unrelated to other divisions, or detracting from essential functions. Divestments may be seen by current shareholders and other investors as management's admission of defeat in a misguided plan since the non-core business was unable to provide the desired results. A decision to divest means that a divisional turnaround is not feasible (or not worth the effort), since the main objective is to produce cash revenues to support reinvestments or to change their strategic positioning, Divestiture Process — Seller Benefits The parent business can cut expenses and concentrate on its main segment when the sale is complete, which solves a typical problem faced by market leaders. The value of the combined entities is lower than the value of the standalone entities if a merger or acquisition is badly executed, indicating that the two entities would be better off functioning separately.More specifically, the purchase of businesses without a long-term integration strategy may result in so-called "negative synergies," which cause stock value to drop after the transaction. In effect, divestitures could leave the parent company (i.e. the seller) with: Higher Profit Margins Streamlined Efficient Operations Greater Cash on Hand from Sale Proceeds Focus Re-Aligned with Core Operations AT&T Divestiture Example A forced divestment may be the outcome of anti-trust regulatory pressure, usually in connection with initiatives to avoid the formation of monopolies. The dissolution of AT&T is a commonly referenced case study for anti-trust divestitures (Ma Bell)The U.S. Justice Department sued AT&T for antitrust violations in 1974; the case wasn't settled until the early 1980s, when AT&T agreed to sell its local-distance services as part of a historic agreement. The "Baby Bells," a collective name for the divested regional units, were brand-new phone businesses established following the anti-trust lawsuit against AT&T's monopoly. Many people now lament the forced divestment because the lawsuit simply slowed down the roll-out of high-speed internet technology for all American consumers. Many of those businesses rejoined the AT&T conglomerate along with other cellular carriers and cable providers after the regulatory environment in the telecommunications sector relaxed. The prevailing opinion is that the division was unnecessary because the “deregulation” that compelled the division of AT&T simply resulted in the corporation becoming a more diversified natural monopoly ‘Types of DivestituresDivestments could be a broad category with various transactional structures. However, the following divestitures are the most typical variations: Sell-Off: In a sell-off, the parent transfers the assets to be transferred to a buyer (such as another corporation) in exchange for cash. Spin-Offs: The parent business sells a particular division, or subsidiary, resulting in the formation of a new company with existing shareholders receiving stock in the new company. Split-Ups: A spin-off creates a new legal organisation with many characteristics to the parent company, but the distribution of shares is different because existing owners can choose to keep their interests in either the parent company or the spin-off. Carve-Out: Carve-outs are a type of partial divestiture in which the parent company sells off a portion of its core businesses through an initial public offering (IPO), creating a new group of shareholders. The parent company and the subsidiary are separate legal entities, but the parent usually retains ownership of the remaining business. Liquidation: The assets are divided up and sold in a forced liquidation, which is most frequently required by a court order in a bankruptcy case.Divestiture vs Carve-Out Because the procedure involves the parent firm selling a portion of its stock position within the subsidiary to public investors, carve-outs are frequently referred to as a "partial IPO." The parent typically owns a sizable portion of the new entity's stock, or more than 50%, which is the distinctive aspect of carve-outs. After the carve-out is complete, the subsidiary has been created as a new legal company with its own management team and board of directors The cash from the sale to third parties is distributed to the parent firm, the subsidiary, or a combination of both as part of the initial carve-out strategy.Financial Restructuring Rearranging a company's assets and liabilities to maximise value for shareholders, creditors, and other stakeholders is referred to as financial restructuring (or corporate restructuring). A corporation may undergo financial restructuring either out of need or as part of a financial strategy. It has to do with the company's capital structure being improved.Reorganizing can take place on either the assets or liabilities side of the balance sheet; if the value of one side changes, the other side will be changed in line with that change. Companies that are now experiencing financial difficulties but have the potential to perform better in the future can embrace this restructure (if the budget is structured according to the situation). There are two components of financial restructuring — Debt Restructuring and Equity Restructuring 1) Debt Restructuring Reorganizing all of a company's debt is known as debt restructuring. Rearranging the balance sheet entries that represent the company's debt commitments is required. The financial management of the company uses it as a tool for business to examine ways to reduce capital costs and boost overall business effectiveness. A company can restructure debt under numerous conditions. These can be classified into three ways — By replacing its current high-cost debt with low-cost loans, a company can shift its debt by taking advantage of numerous market opportunities.To lower the cost of borrowing money and boost working capital, a company that is having trouble with liquidity or limited debt service capacity may choose to restructure its debt. Debt restructuring is a way for an insolvent company to become solvent and stop suffering losses. Reasons of Equity Restructuring To prevent corporate insolvency To lessen debt and convert it into predictable, manageable monthly payments To expedite communication with creditors and other lenders (such as banks and institutions) To maintain managerial authority To avoid paying unneeded legal fees To maintain a constant cash flow and control spending To gain credibility again. 2) Equity RestructuringEquity restructuring is the process of rearranging the balance sheet's reserves and equity capital (shareholders' capital). Equity restructuring is a highly regulated financial tool that entails a legal procedure. It primarily discusses the idea of capital reduction The following are the methods of equity restructuring — Buying back shares from shareholders is one way to restructure the share capital. This aids in lowering the company's liability to its shareholders, resulting in a decrease in capital but a return of share capital. Equity restructuring is possible by deducting the share capital through the use of the proper accounting entries. Without actually returning equity capital in the form of cash, this will help to decrease the amount owned by the company to its shareholders. Restructuring can also be accomplished by lowering the required dues for shareholders. The share capital may also be consolidated or the shares may be divided. R ns of E. Restri rin To correct over capitalization To shore up management stakesTo provide respectable exit for shareholders in the period when market is down. To record unrecognized expenditure To maintain efficiency in debt-equity ratio To raise fresh finance.What is a Joint Venture? Using a joint venture (JV) is a method of company reorganisation. It is a contract between two or more parties to pool their resources (often finance, expertise, execution capacity, and local network) in order to accomplish a shared business objective. Joint Ventures, in contrast to most partnership agreements, have a set time frame and objective. Since each partner in the JV provides their core skill, the parties to the JV can make use of their combined resources to successfully and efficiently accomplish their business goals. Additionally, compared to individual efforts, the joint effort of all JV entities increases the likelihood of success. All parties participating in the joint venture typically sign the joint venture agreement (IVA). A good JVA specifically states the goal or purpose of the JV's formation, the liabilities and benefits each participant will receive in exchange for their contributions, the JV's term and termination terms, and the applicable laws in the event of a legal disagreement. Benefits of entering into a Joint Venture + Possession of essential technological expertise and proprietary technology * When entering a new market, having access to a local distribution network and understanding local customs and consumers * The capacity for a new entity to grow upon combined resources and immediate access to the essential resources of other parties + JV isa separate business, so the liability is restricted. + Less risk when compared to a single venture‘Types of Joint Venture — with the Example * In order to achieve mutual benefits, the joint venture entities bring their respective core capabilities to the table. * Access to resources and technical capabilities for private companies * Institutions of government that construct infrastructure (Publi Partnerships) Key Success Factors for Joint Venture Definite PurposeAll parties involved in the JV should have a single business aim that drives all of their ambitions. This brings us to the first component of JVA, namely, purpose. In the JVA, the JV's aim should be made clear, and all parties should stand to gain from it. Strong Stakeholders Each party in a joint venture should offer their core capabilities with the single goal of making the joint venture successful. JVs are doomed to fail if the JV partners have a secret agenda to take unfair advantage of the JV. Therefore, JV partners must exercise careful due diligence. Additionally, the parties’ level of trust in one another is crucial. Risks, Responsibilities, and Repercussion The benefits (profit sharing), risks/liabilities, and consequences on each party if the JV does not produce the expected results should all be explicitly laid out in the JVA. All parties engaged should have a clear understanding of the roles and duties.Employee Stock Ownership An employee benefit plan that gives employees stock in the business is known as an employee stock ownership plan (ESOP). Each qualifying employee receives a predetermined number of shares of business stock from the employer without having to pay anything up front. The allocation of shares may be made in accordance with the employee's pay scale, contract terms, or another basis. Until an employee leaves the company or retires, the shares for an employee stock ownership plan are retained in a trust unit for security andgrowth. Following they departure, the corporation buys the shares back and distributes them to more employees. Investing in the employer's business is what an employee stock ownership plan does. The plan's objective is to balance the interests of the company's shareholders and the interests of its employees. Giving employees stock in the business allows them to go from being merely employees to business owners. Since they are also shareholders, the programmes encourage employees to act in the best interests of the shareholders. Employee-owned corporations, which resemble worker cooperatives, are businesses where the majority of shareholders are employees. With an employee stock ownership plan (ESOP), as opposed to a worker corporative, the company's capital is not dispersed equally. Consequently, senior employees receive larger shares than newly employed staff the latter exercise less voting power during shareholder meetings. How an ESOP works In order to contribute new shares of the business's stock or money to purchase existing shares, a corporation that wishes to establish anemployee stock ownership plan must set up a trust. Up to a certain amount, these trust contributions are tax-deductible. The shares are subsequently distributed across each employee's individual accounts. The formula for allocating funds most frequently uses either compensation, service years, or both. When new employees have worked for at least a year, they typically join the plan and begin receiving allocations. Before employees are eligible to receive the shares they were allotted through an ESOP, the shares must vest. The rising rights that employees obtain on their shares as they gain seniority in the company are referred to as vesting in this context. Employees who are ESOP participants should receive their equity when they leave the company. Within 60 days of the employee's departure, private enterprises must repurchase the leaving employee's shares at fair market value. Private corporations are required to conduct an annual stock valuation in order to determine the share price. The corporation needs to make sure it has enough cash on hand to cover all the share repurchases in cases when some long-term employees are leaving the organisation and the share price has increased significantly.