International Corporate Reorganizations: Practice Tips for US and Non-US Lawyers

A run-of-the-mill international corporate reorganization involving a mid-sized corporate group can often involve transactions among entities in 15 or more jurisdictions. Typically, corporate reorganizations involve distributions, transfers and contributions of equity, assets, promissory notes (or other receivables), cash and other assets and liabilities. There can also be redomiciliations, entity conversions, mergers and other business combinations, as well as new intercompany operational arrangements.

It is imperative at the earliest planning stages to have a basic understanding of the local legal issues that can impact the timing and complexity of the reorganization transactions to most effectively structure and consummate a reorganization.

We have set forth below our top six legal practice tips for US and non-US professionals to consider when beginning to map out the work plan for an international corporate reorganization. These practice tips will help you get off to an effective start on a reorganization project and set appropriate expectations early.

Top six practice tips for US lawyers

1. Understand governance and transaction formalities. It is important to understand who needs to sign what, whether documents can be signed with electronic signatures and whether documents need to be notarized and/or apostilled.

• Some non-US jurisdictions require more than one signatory for documents to transfer shares, revise corporate structures or transfer corporate assets.
• In some non-US jurisdictions, directors grant powers of attorney to law firms to hold board and shareholder meetings to authorize transactions.
• Outside the US, notaries are generally legal professionals who attest to corporate formalities (in addition to a signing party’s identity) and may have obligations to diligence that all legal requirements are satisfied. Notaries may have their own KYC requirements. Generally, you will need to make an appointment to have a notary present when documents are signed, impacting timing, and notaries’ fees can be significant.
• Corporate service companies can provide apostille services, but they involve sending originally signed and notarized documents to the corporate services company for application of the apostille. These services can take weeks and require advance planning.

2. Consider requirements for distributions, contributions and mergers.

• Corporate law in many non-US jurisdictions requires solvency testing and/or specified levels of assets (reserves) or profitability for a company to distribute cash, promissory notes or other assets to a parent company. Similarly, in some jurisdictions, consideration in the form of equity must be issued in connection with the contribution of cash, promissory notes or other assets to a company, and back-up for the valuation of the equity and assets may be necessary, including, in some jurisdictions, a third-party fair market value determination.
• Some non-US jurisdictions require pro forma or audited financial statements to support reorganization transactions. These requirements can involve substantial lead time.
  
•  Not all jurisdictions recognize or permit mergers and, therefore, combining the businesses of two or more companies may require asset and liability transfers – with all attendant complexities. For example, in many jurisdictions, the baseline position is that a contract cannot be transferred without the consent of the counterparty and/or novation of the contract by both parties.

3. Review the impact on employees.

• In many jurisdictions, the transfer of a business automatically transfers employees to the new owner.
• In some jurisdictions, individual employees or their collective representatives (including works councils) have protections or are otherwise entitled to consultation or consent rights in connection with substantial changes to the business they work for or the terms of their employment – which can include corporate reorganizations. These rights may include comprehensive procedures for dealing with employees, including specific timelines and mechanisms to object. In some jurisdictions, the procedure is less well-defined and more open-ended. These consultation and consent obligations can present significant negotiation and timing issues (including waiting periods) for completion of any corporate reorganization.
• Some reorganization transactions may result in loss of employment giving rise to contractual and/or statutory severance entitlements and other social protections.

4. Redomiciliation.

• Many jurisdictions do not provide for a streamlined procedure to redomicile a company from its original jurisdiction of organization to another jurisdiction.
• Multi-step redomiciliations may trigger tax obligations in some jurisdictions, even if domicile in a particular jurisdiction is transitory.

5. Think outside the box. In some jurisdictions, changes in company ownership – even without a change in ultimate ownership and control of the company – can trigger merger control and FDI filing and approval requirements – sometimes with significant penalties for non-compliance – as well as other governmental filing requirements. Consult local practitioners to confirm if there are any other unique legal requirements applicable to the proposed transactions.

6. Tax. Involve the tax team early, as unanticipated tax costs can eliminate efficiencies that can otherwise be achieved through internal corporate restructurings.

• In many jurisdictions, internal restructurings may qualify for tax deferral and/or exemptions, but there may be specific requirements to obtain the available benefits.
• Consider indirect taxes, such as VAT, GST and stamp taxes that may apply even in situations where there is an exemption from income tax.
• A restructuring may impact future distributions of income, as well as intercompany financing. The availability of exemptions from withholding and other taxes on interest and dividends may be impacted by movement of entities within a group of corporations.
• Restructuring transactions are subject to reporting requirements, including by advisors, in a number of jurisdictions, even if there is no tax benefit to the transaction. It is important to understand what reporting requirements might apply and the timing for when such disclosures may be made.

Top six practice tips for non-US lawyers for US companies

1. Understand the US’s federal system. Each state and territory of the US has its own corporate and employment laws (resulting in more than 50 local corporate and employment law regimes), with some matters (taxes, the sale of equity and debt securities, antitrust, FDI, some employment and pension matters, among others) either governed by federal law or also governed by federal law. Do not assume uniformity across all US jurisdictions.

2. Do not expect publicly available documents. Generally, less information is publicly available about US private companies  than in many non-US jurisdictions. Publicly available financial statements, share registers and director registers generally do not exist for private companies. Corporate bylaws, partnership agreements and limited liability company agreements, which set forth specifics about adopting resolutions, electing directors and officers and other governance and corporate matters generally are not publicly available.

3. Understand corporate governance.

• Corporate directors generally have responsibility for setting corporate policies and strategy and authorizing material corporate actions. 
• Corporate directors generally do not have an active role in corporate operations and generally do not sign agreements.
• Officers and directors cannot grant powers of attorney or proxies to others to act on their behalf in their capacities as officers or directors.

4. Consider sanctions, export controls and restricted party compliance. You must confirm whether any entities, officers, directors, shareholders, included jurisdictions or contract counterparties are subject to OFAC sanctions, Export Administration Regulations or ITAR controls, even in the absence of a change in ultimate ownership.

5. Think outside the box. Certain types of entities, mergers, certain liquidations and certain equity conversions may not be recognized or have direct analogs in other jurisdictions. Consider the characterization of a US-law transaction under any applicable local corporate, regulatory or tax regimes.

6. Tax. Unlike many non-US jurisdictions, the US generally has a worldwide tax regime where US companies are subject to tax even on income sourced to non-US jurisdictions. US investors also are subject to complicated “controlled foreign corporation” regimes that can be impacted even when a restructuring is wholly between foreign companies.

• Understand the options for investment in the US and the attendant tax considerations. Partnerships and disregarded entities can minimize multiple layers of taxation, but can subject their owners to other US tax obligations.
• The US “check-the-box” regime provides for additional flexibility in planning from a US tax perspective, but be sure to consider the application of anti-hybrid rules in any planning involving such elections.
• Do not forget about state taxes. In addition to federal income tax, each of the individual states in the United States has its own income tax and indirect tax laws. It is important to consider how these may apply in connection with any restructuring.