We often hear “So, you have supported your clients in eliminating entities in over 60 countries – are you specialists in the elimination processes in all of those jurisdictions?”
No! We are not fluent in the legal, tax and other requirements for each elimination process in over 60 different countries – nobody is. However, we ARE specialists in the fundamental, underlying principles of the exit process and this experience allows us to deliver multi-jurisdictional rationalisation projects to our clients.
No matter where your operations are, the principles of legal entity exit are the same. That being said, local laws and legislation often do their best to add a few road bumps to the restructuring journey. This was never more relevant than when we were leading a project to exit a client’s operations in Kazakhstan. We were delayed in execution because the local government furnace was out of service awaiting vital parts. The furnace was the only method by which the destruction of a number of legacy fixed assets owned by the company, which had nil value, could be achieved to the satisfaction of the authorities. Whereas tax authorities in most jurisdictions will take a laissez-faire approach to old laptops/ monitors/ chairs and desks, the Kazakh tax authorities required video evidence with visible serial numbers of assets being burnt to a cinder before they would provide liquidation clearance!
We haven’t seen it all, which is part of the reason we love these projects. But we have seen a lot and know how to overcome most, if not all, scenarios through that experience and our network of connections.
Putting these exceptional circumstances aside, the general LER process has several common principles which, when used within a controlled project management framework, can get an entity in almost any jurisdiction 90% ready for elimination. The last 10% is where local tax/ legal/ valuations input may be key.
1. Legal exit mechanism
Having undertaken legal entity exits in over 60 jurisdictions, legal exit mechanisms ALWAYS follow the same core approach – it is either merger or liquidation, or some form thereof.
OK, merger could take the form of a sister-merger or it could be an upstream or parent-subsidiary merger. It could be a reverse merger (Italy) or an Entire Business Transfer (Thailand) or a Global Assignment Project (Spain) – the names and jurisdictions change but the process at its core is the same. Whatever it is called the result will be the same – a transfer of business, assets and people from one entity to another, usually in exchange for consideration to compensate the “seller” in the form of cash or shares in the new merged enterprise. The general principles preceding a “merger” in terms of entity preparation are, therefore, almost identical in any country.
On the liquidation side, whether it is liquidation followed by dissolution, dissolution followed by liquidation, deregistration, straight dissolution, registration extinguishment… the principles are simple. Whatever it is known as locally , the result will be the elimination of an entity and again, the principles of preparing the entity for “liquidation” will be very similar, irrespective of the country in question.
We have seen projects stall as advisors get overly concerned by the ins and outs of the methods available. The simple truth being that you are either merging or liquidating! In-country legal advisors can clarify the nuances in the local elimination method but these are rarely an obstacle as they are prescribed by local legislation and are an administrative formality.
2. Country-agnostic due diligence, planning and internal approval process
The common due diligence data and information points are as relevant in Japan as they are in Jamaica or Jersey. Wherever you are in the World, you need to understand ALL of the fundamental parts of the entity you are reviewing so that an accurate assessment of risks, issues and resolution options can be identified, planned for and executed.
3. Solvency considerations
Regardless of the jurisdiction, an insolvent entity will almost always need to be restored to solvency before it is eliminated; otherwise you may well be in the realms of an insolvent process which of course introduces a far greater emphasis on external scrutiny and regulation.
Of course, the method used to restore solvency usually comes down to the tax implications on both sides of the transaction.
4. Customers
Customers are critical and the considerations around moving them are consistent irrespective of the jurisdiction within which you are operating.
In terms of underlying agreements, contract law generally dictates that you are looking for common clauses around change of control, form of notification and notice periods. These clauses may be customer specific, but the clause focus will remain consistent wherever you are in the World.
Similarly, customer communication and the legal transfer mechanism for contracts is almost always the same. The process will usually comprise a pre-transfer notice with planned dates/ transferee details either in the form or a novation deed or otherwise (consider “deemed novation” language which is becoming more common for larger scale customer transfers) and a post-transfer notice providing confirmation of the transaction and its particulars.
Government customer contracts will always be more complex, just by the nature of public procurement controls, rules and procedures.
5. Employees
Probably the most sensitive area of any restructuring – get it right and the process should run smoothly; get it wrong and you risk losing key staff and with them customers.
Again, the common themes around understanding employee profiles (permanent, secondment, contractors), target and transferee terms and conditions and whether they are similar or different, confirming if there are workers’ councils, unions or pension schemes, etc. are the same in Australia as they are in Austria.
The general process (T&C review —> employee consultation —> formal notification —> formal transfer…….) is, again, consistent. Nuances around time periods/ form of notification may vary and it is of course advised to get local HR expertise to support the general process to ensure it is carried out correctly and in accordance with local regulation.
Using the core underlying principles of LER, and our ability to achieve solutions quickly, JC Consulting have supported clients to eliminate legal entities in over 60 jurisdictions, proportionately utilising our global legal, tax and valuations network where and when needed.
JC Consulting provides restructuring advisory and project delivery services. Our restructuring advisory expertise is combined with core principles of project management to drive projects forward in a controlled environment – it is what sets us apart from other advisors.
We have successfully eliminated legal entities in more than 60 jurisdictions in all corners of the globe and have a legal network which covers 80 jurisdictions.
We often embed ourselves in our clients’ teams in order to become familiar with their business, practices and people to help drive the results required.
Based in the UK, we also have a presence in Europe and Australia, enabling us to meet the needs of our global clients.
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