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Gestoria R. Consult.

Globally & Digitally Experienced Business

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Getting back to business following the pandemic of Covid19

It is true that Covid-19 pandemic is continuously creating significant challenges to which the business environment needs to respond quickly, in a manner mitigating the losses and fighting against the disruptions. The virus threat is likely to diminish, but businesses will be affected on medium and long terms.

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Reorganization and Corporate Restructuring 

These may be seen as ways to help the businesses strengthen their resilience and adjust to the new environment.

In the current conditions, our opinion is that we will experience an increase of the corporate restructuring and reorganizations operations in the near future.

Why corporate restructuring?

First of all, corporate restructuring is an operation undertaken with the purpose to reorganize the structures of a company from legal, operational and management perspectives, so that the company becomes more profitable and organized for its current needs.

There are a number of reasons for which a company needs restructuring, these being: (i) reducing costs; (ii) incorporating new technology; (iii) focus on essential products; (iv) spin off as a subsidiary of a company; (v) merger with another company.

Which corporate restructuring mechanism is the most suitable?

For companies who are in financial distress, a corporate restructuring is a way to diminish the costs, thus avoiding the filing for insolvency. In this scenario, the company may identify its valuable assets, dispose of them and obtain thus liquidity to pay off its creditors or a secure a loan from a financial institution and avoid an imminent insolvency with all related consequences.

In this scenario, an asset sale is involved and/or a financial package in place, in which case the creditor generally requests that certain security is given by the debtor.

In other cases, the financial distress is not the cause of the corporate restructuring, but the need to consolidate its market position and/or become stronger by reorganizing its debts and operations. In this scenario, it is possible to renegotiate the terms of the debt with the creditors and/or spinning off those operations which are not at core of its business. Therefore, the company may focus on its essential operations and/or services and/or products.

The current economic and financial framework triggers one of the most dramatic consequences for the business environment, this being the “out of cash” date, where the respective company has a negative cash flow and is losing money every month as it does not have positive cash flow from its operations. In this scenario, the management team and/or the shareholders may need to take measures to save the business by cutting costs aggressively. As a consequence, the company may obtain loans to save the business. This was one of the preferred ways for the technology companies to save the businesses during the tech bust in the early 2000s.

A financial model should be made to gauge the situation and serve as a guide for the revised operations.

The reorganization is the procedure is the legal operation having as purpose the establishment, modification or extinction of the legal person.

There are various ways to achieve the reorganisation of a company, namely: 

Merger, division or transformation

General aspects pertaining to each of the three (3) are summarized below:

Merger is the operation by which a company is being acquired by another company or represents the operation where several entities are merged in order to create a new company. This operation is performed in two stages.

The first stage implies drafting a project of merger approved in accordance with the provisions of the constitutive act of the companies involved. The second stage implies the implementation of the merger by the management bodies. The merger will be lodged with the office of commercial registry.

Generally, a merger as a means to reorganize a company is used when a company intends to consolidate its position on the market, or when the intention is to have a higher quota on the local market, or to expand in other regions. One of its advantages towards other forms of reorganisation is the fact that it saves the business and the employees of the company. The protection of the workers in the context of the transfer of undertakings is to be taken into account.

The division is made when a group of companies is being reorganised or when the company intends to save costs by outsourcing support activities (such as IT, administrative) or when it closes its operations on a market for certain services in order to focus on another attractive market.

Transformation of the legal person is the operation by which a legal person ceases to exist, whilst simultaneously a legal person is created. The rights and obligations of the legal person who ceased to exist are transferred to the newly created legal entity, safe for the case where the act on which the transformation was created, provides otherwise.