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Types of Corporate Reorganization

Essay by   •  May 10, 2018  •  Study Guide  •  1,447 Words (6 Pages)  •  1,129 Views

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Reorganization is a process designed to revive a financially troubled or bankrupt firm. A reorganization involves the restatement of assets and liabilities, as well as holding talks with creditors in order to make arrangements for maintaining repayments. Reorganization is an attempt to extend the life of a company facing bankruptcy through special arrangements and restructuring in order to minimize the possibility of past situations reoccurring. Generally, a reorganization marks the change in a company's tax structure.

Reorganization can also mean a change in the structure or ownership of a company through a merger or consolidation, spinoff acquisition, transfer, recapitalization, or change in identity or management structure. Such an endeavor is also known as a "restructuring."

Corporations reorganize and restructure for various reasons and in numerous ways. Companies reorganize to increase profits and improve efficiency. The reorganization of a company typically addresses the efficiency component in an attempt to increase profits. Often when a company acquires a new CEO, that person chooses to reorganize it. In the case of a buyout or takeover, corporations reorganize in order to bring the company back better than ever.

There are various reasons why your corporation might need to undergo reorganization, in particular:

  • Recent merger or acquisition
  • To stay competitive
  • To “shake things up”
  • Realign the business
  • New strategy (or strategies)
  • Improve communication
  • Prelude to downsizing
  • Better decision-making
  • Better execution – related to strategy
  • Going global
  • Free-up creativity and innovation

There are seven types of corporate reorganization your company can participate in.

  1. Consolidations and Mergers
  2. Acquisition of a Target Corporation Liquidation
  3. Acquisition of a Subsidiary Liquidation
  4. Recapitalization
  5. Type D Transfers
  6. Type G Transfers
  7. Identity Change

Type A: Consolidations And Mergers

Consolidations and mergers are statutory in nature and based upon a company purchasing another company’s assets.

Advantages:

  • No requirement that consideration be voting stock. As much as 60% of consideration can be cash and property without tax consequences for the stock received (cash and other property received are taxed).

Disadvantages:

  • All liabilities of target corporation are assumed by acquiring corporation as a matter of law.
  • Acquiring approval of majority sheraholders, dealing with dissenters’ rights, and holding shareholder meetings, as required by foreign, state, or Federal law, may present problems.

Type A of reorganization is suitable in case when one company is ready to take ownership of all the assets and liabilities of another company, taking into account all legislative features in order to strengthen and improve the competitive position in one or more markets.

Type B: Acquisition Of A Target Corporation Liquidation

A Type B reorganization is the acquisition of one company's stock by another corporation, with the acquired company becoming a subsidiary of the acquiring corporation.

Advantages:

  • Stock may be acquired from shareholders.
  • Procedures to effect reorganization are not complex.

Disadvantages:

  • Only voting stock of acquiring corporation may be used
  • Must have 80% control of a target corporation
  • May have minority interest remaining in target corporation.

Type B of reorganization is suitable in case when one company is ready to take control of another company as a result of acquiring its ownership, but retaining a certain economic independence of the subsidiary.

Type C: Acquisitions Of A Subsidiary Liquidation

Acquisition of a target subsidiary corporation involves another company acquiring your company’s stock. The company that was acquired them becomes a subsidiary of the company that acquired them. This acquisition plan must take place within a year of the start of the process. The transaction is carried out in order for the company to obtain stock in voting.

Advantages:

  • Less complex than “type A”, no foreign, state, or federal to follow;
  • Cash or property consideration for 20% pr less of fair market value of property transferred is acceptable.
  • Acquiring corporation assumes only the target’s liabilities that is chooses.

Disadvantages:

  • Susbstantially all assets of target corporation must be transferred.
  • Liabilities count as other property for 20% rule if any consideration other than stock liabilities is used.
  • The target corporation must distribute the stock, securities, and other properties, it receives in the reorganization to its shareholders.

Type C is suitable for situations like in the previous type of reorganization, but the key difference is that it ensures the process of setting up a subsidiary for up to one year with the ability to choose which obligations the absorbing company will meet in the future

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