Understanding Corporate Restructuring
Updated: Jan 22
Corporate Restructuring is the phenomenon adopted by the corporate entity to modify its capital as well as the operational structures. In short, it is the rearrangement of business entities. The Corporate Restructuring Comes into the question majorly when a company or a corporate entity befalls into a loss. There are mainly 2 kinds of corporate restructuring- internal restructuring and external restructuring. The decision of an entity to not merge with other company, but to make certain internal changes in the management as well as the financial structure and thus sustaining against the loss is called the internal restructuring. External restructuring arises when a company decides to merge with other Company or a corporate entity, to deal or counter with the losses which have been sustained.
Why should a Corporate Entity Go for Restructuring?
Corporate restructuring Mainly Happens through Mergers and Acquisitions. Sometimes, a company is forced to undergo restructuring, for sustenance and the survival of the Company. the Mechanism of Corporate restructuring will be available as an alternative, as a method of rescuing itself from the loss Sustained. Sometimes, a Corporate Entity would be aiming for entry or access into the Market, or for the expansion of the Company by paving an entry into the Market. for this, corporate restructuring plays an Important and a Key role.
Motives Behind The Corporate Restructuring
There are mainly 5 motives behind Corporate Restructuring. They are:
Synergy: Under this perspective, Synergy can be mainly understood as the benefit arising from the Profit of two or more Companies. Synergy can be explained through a simple arithmetic logic. normally, one plus one is equal to two, in case of the arithmetic. But in Synergy, one plus one would be equal to 3 or five, or five hundred, etc. this means that if two companies merge or join together, the profit arising from such a merger could be perhaps double or more of what a company could earn Individually. That is, the resulting value of the combining units will be more than the individual value of the units that are combining. Synergy can be financial, operational, or managerial. Financial synergy is the benefit in terms of finance that accrues from the resultant company, so the company can take up new ventures. Operational synergy is accrued in terms of operational benefits to the resultant company, and managerial synergy is accrued from the management of the resultant companies, getting management advantages.
To Attain Economies of Scale: This refers to the decrease in the average per unit, as the result of the increase in the average scale of output. In simple terms, when production will increase, the cost will decrease.
Good Market Entry: Mainly aiming for entry into the European market. it can be through Either organic way or inorganic way of growth, were in an organic way you grow slowly and get established as the big company gradually. Diversification of Various portfolios can be achieved through the Inorganic way of growth.
Tax Benefits: When a healthy Company merger with the sick Company, the Companies would When 2 or more Companies merges, they would accrue certain Tax Benefits, so that the company could reduce it's Tax Expenditure.
Replacement of Poor management- Sometimes, the company Stoops into loss due to the poor Management System. This is where internal Corporate Restructuring mainly takes place. Sometimes, if a company is not managed well or its potential is not utilized at the optimum level, it can be a target for the acquisition.
Theories of Corporate Restructuring
Profit Maximisation theory and Management Utility Theory are the two major theories related to corporate restructuring. The Objective of Profit Maximisation is to maximize the profit of the shareholders. In the Management Utility Theory, the takeover can resort if the managers believe that the company could go for a merger and if they can go for it, in the best interest of the company.
According to Law, a Company, or a Corporate Entity is always considered as an Artificial person. Also being an Artificial Legal person, the Company also accrues many benefits, such as perpetual succession, limited liability, right to hold property, etc. In the case of corporate restructuring, a Company is considered as a property. It is treated as the property to be brought and sold. Through buying and selling, the transferring company is trying to acquire the company in the market. The control of the company is acquired through the acquisition of majority shares in the company.
ABOUT THE AUTHOR
Swathi. Ashok. Nair is currently pursuing Law at the School of Legal Studies, CUSAT, Kerala.
They can be contacted at firstname.lastname@example.org
DISCLAIMER BY LEGAL ARMOR
We at Legal Armor do not endorse the Authors' views and are in no way responsible for the said views. We are just publishing the Write-ups as blogs with just light editing, and are in no way responsible for any legal claims. Legal Armor shall not be liable for any plagiarized content by the author.