7 reasons businesses restructure and the legal considerations

Restructuring is a term that often causes feelings of uncertainty or unease among business owners. However, from a legal standpoint, restructuring can be an incredibly beneficial process; helping businesses adapt to new market conditions, improve operational efficiency, and ensure long-term stability.

Here, we explore the seven most common motivations behind business restructuring and the legal considerations.

Why do businesses restructure?

  1. Financial health:

Restructuring can help streamline operations, reduce overheads, and ensure the business remains solvent. For example, a restaurant chain facing declining sales may decide to close underperforming branches, reduce its workforce, and renegotiate supplier contracts. This cost-cutting ensures the business remains financially viable.

  1. Technological advancements:

In our digital age, technology can render certain roles redundant while creating a need for others. Restructuring allows businesses to align with current technological trends and advancements.

Take Blockbuster, a video rental business, as an example. They faced big challenges when digital streaming platforms like Netflix came to the market. Had they restructured earlier to integrate digital streaming into their business model, they may have remained competitive.

  1. Operational efficiency:

Restructuring can be useful in streamlining business operations. This might involve eliminating redundancies, optimising supply chains, or consolidating certain business units.

  1. Mergers and acquisitions:

When two companies merge or one is acquired, restructuring is often necessary to integrate the businesses efficiently.

When Disney acquired 21st Century Fox in 2019, they needed to restructure to efficiently integrate Fox’s assets and streamline content production.

  1. Changing business strategy:

In response to changing market conditions, businesses might restructure to pivot their strategy, perhaps by targeting a new audience or launching a new product.

  1. Regulatory and tax implications:

Changes in the legal or regulatory landscape can necessitate restructuring, especially if it means the business can benefit from more favourable tax treatments or regulatory conditions.

  1. Market dynamics:

Changes in the market landscape, such as emerging competitors, shifting consumer demands, or regulatory adjustments, might necessitate a restructure.

For example, Blackberry was once a leader in the smartphone market but faced fierce competition when Apple and Android devices came to the market. They restructured in 2013, moving from smartphones to software; making $1 billion in software revenues by 2020.

Legal considerations when restructuring a business

Employment laws:

One of the most sensitive aspects of restructuring is potential redundancies. UK employment laws, including the Employment Rights Act 1996, stipulate specific procedures and rights associated with redundancies.

If you’re unsure about the legalities surrounding employee and employer rights, get in touch with our employment solicitors here.

Debt and creditor agreements:

When a business considers restructuring due to financial difficulties, one of the primary areas of concern is any outstanding debt or agreements with creditors. These agreements dictate the terms and conditions under which the business owes money, and can significantly influence the restructuring process.

It’s important to understand your obligations, as per the Insolvency Act 1986.

Contractual obligations:

When a business undergoes restructuring, certain contracts it has entered into might have “change of control” or “material adverse change” clauses. Activation of these clauses can lead to penalties, renegotiation, or even termination of the contract. Therefore, it’s critical to meticulously review all contractual agreements to identify and address any potential implications of the restructuring process. An experienced solicitor will be able to help with this.

Regulatory compliance:

Businesses in sectors like banking, healthcare, or energy often face strict regulations. When restructuring, these businesses might need to obtain approvals from regulatory bodies, ensure continued compliance with licensing requirements, or adhere to industry-specific guidelines related to mergers, divestitures, or other structural changes. Failing to comply can result in penalties, sanctions, or legal challenges.

Statutory and regulatory compliance:

Any business considering a restructure must ensure compliance with various statutory and regulatory frameworks. These may pertain to employment law, company law, tax implications, and specific industry regulations. For example, in the UK, businesses must adhere to the Companies Act 2006, ensuring decisions made align with the best interests of shareholders and stakeholders.

Contractual obligations:

Business contracts, including supplier agreements, employee contracts, and customer agreements, might need revisiting during a restructure. It’s crucial to assess any potential breaches or necessary modifications to fulfil contractual commitments.

Restructuring for future success

Restructuring, though sometimes met with apprehension, is a pivotal step for businesses aiming to adapt and thrive. It addresses challenges ranging from financial concerns to technological evolution and shifting market dynamics. Cases like Blackberry highlight the importance of timely adaptation. Legally, restructuring is intricate, with UK laws governing areas from employment to insolvency.

At Rubric Law, we provide bespoke legal solutions for businesses undergoing restructuring. Get in touch today if you need advice:

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