Corporate Restructuring Before Selling a Company

Organizing the ownership structure before initiating a sale process

Before initiating a sale, it is often necessary to review the company’s corporate structure. Many companies have evolved over the years by bringing in partners, creating new entities, or making decisions that addressed specific needs at the time, but these may not always be appropriate for a future sale.

Corporate restructuring involves analyzing a company’s ownership and corporate structure to identify factors that could hinder a sale or acquisition and taking the necessary steps to address them.

It’s not just about organizing documentation. The goal is to eliminate obstacles that could affect negotiations, create uncertainty among buyers, or reduce the perceived value of the company.

This phase typically takes place after conducting a due diligence process to sell a company and before initiating contact with potential buyers.

Why reorganize the company before selling it?

Corporate structure is one of the first aspects that buyers review during any M&A transaction.

When there are issues related to ownership of shares, conflicts among partners, statutory restrictions, or overly complex structures, buyer confidence suffers and the transaction can become significantly more complicated.

Disorganized structures create uncertainty about who can make decisions, who must approve the sale, and what risks might arise after the closing.

On the contrary, a clear structure facilitates the analysis of the company, conveys professionalism, and reduces the risks associated with the transaction.

Common Corporate Issues Before a Sale

There are certain situations that frequently arise in companies preparing for a sale.

One of the most common issues is the excessive fragmentation of equity among numerous minority shareholders. This situation can hinder decision-making and increase the risk of deadlocks during negotiations.

Verbal agreements that were never formalized, disputes over the actual ownership of certain shares, and the lack of clear agreements regarding the transfer of shares and decision-making are also common.

Another recurring problem is conflicts among partners, especially when there are disagreements regarding the company’s valuation or whether it is advisable to sell.

Furthermore, many companies have complex corporate structures, with multiple entities, intermediate holding companies, or a mix of operating and non-operating assets, which make it difficult for the buyer to understand the business.

Common Corporate Reorganization Procedures

Reorganization can take various forms depending on the characteristics of each company.

Among the most common measures is the consolidation of share capital to reduce shareholder fragmentation and simplify the decision-making structure.

It may also be necessary to reorganize ownership interests among partners, resolve historical undocumented issues, or separate assets not related to the core business that the business owner wishes to retain.

In complex corporate groups, it is common to simplify the structure through mergers, spin-offs, or the elimination of intermediate companies that serve no significant economic purpose.

Similarly, the status of directors, powers of representation, and articles of incorporation are typically reviewed to align them with the needs of a future corporate transaction.

Pre-sale Shareholder Agreements

In addition to reorganizing the ownership structure, it is often essential to formalize agreements among partners before beginning the sale process.

These agreements help regulate key aspects and reduce the risk of conflict during the operation.

Of particular importance are drag-along rights, which allow the majority shareholder to compel minority shareholders to sell under the same terms when there is an offer for the entire company.

Tag-along rights are also common; they protect minority shareholders by allowing them to sell their shares alongside the majority shareholder.

In addition, decision-making procedures, conflict-resolution mechanisms, confidentiality obligations, and minimum criteria for accepting a takeover bid may be established.