Forms of Corporate Restructuring for CA Final AFM

Corporate restructuring is any major change in a company's business mix, ownership, control or financing, made to improve value. It can be expansion-oriented (growing), contraction-oriented (shrinking or focusing), or about control and capital structure.

Expansion forms include merger (two or more companies combine into one), amalgamation (the same idea under company law, either by absorbing into an existing company or forming a new one), and takeover or acquisition (one firm gains control of another, often by buying shares, without the target necessarily disappearing). In a merger the target usually loses its separate identity. In a takeover the target can continue as a subsidiary.

Contraction forms reduce or reshape the business. A demerger transfers one or more undertakings of a company to another company, and the shareholders of the demerged company usually receive shares of the resulting company. The resulting company may be an existing company or a newly formed one. In Indian usage, a demerger means a scheme sanctioned by the court/NCLT under ss.230-232 of the Companies Act, 2013 that meets the conditions of s.2(19AA) of the Income Tax Act. These include transfer of the undertaking as a going concern, transfer of all the properties and liabilities relating to the undertaking immediately before the demerger at the values appearing in the books of account (no revaluation), issue of shares by the resulting company to the shareholders of the demerged company in proportion to their holdings, and shareholders holding at least three-fourths in value of the shares of the demerged company becoming shareholders of the resulting company. A spin-off is a general finance term, not defined in the Act. It typically involves the parent moving a unit into a new company whose shares are issued to existing shareholders in proportion, so ownership mirrors the parent. It is therefore usually seen as a demerger with a new resulting company, but a demerger as such does not require the resulting company to be new. A split-up divides one company into two or more new companies and the original company ceases to exist. A split-off gives shareholders the choice to exchange parent shares for subsidiary shares. A divestiture is a sale of a division or asset to an outside party for cash, and the seller receives the money, not its shareholders.

A slump sale is the transfer of an undertaking as a going concern for a lump sum consideration, without values assigned to individual assets and liabilities. The consideration may be cash or shares. A slump sale is not automatically a divestiture: it is a divestiture only where the seller sells to an outside party for cash. If the consideration is shares, the seller does not receive cash and the transaction may not be a divestiture. Under Indian tax law (s.2(42C) and s.50B), the gain on a slump sale is the lump sum consideration minus the net worth of the undertaking. Net worth is the aggregate value of total assets minus liabilities. Depreciable assets are taken at written down value (WDV) as computed under the Act, other assets are taken at book value, and revaluation is ignored. The gain is a long-term capital gain if the undertaking was held for more than 36 months, and a short-term capital gain otherwise. Compare it with an itemised sale, where each asset has its own price. Buyouts transfer control: in a management buyout the existing managers buy the business, and in a leveraged buyout the purchase is financed mainly by borrowing against the target's assets or cash flows.

Motives drive the choice. Common ones are synergy, entering a new market, vertical integration, removing a competitor, using tax losses or surplus cash, focusing on core business, unlocking value from a hidden division, raising funds, and removing a drag on the group's valuation. Always tie your answer to the motive in the case.

Use this order for any theory, difference or case question on restructuring forms.