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Holding companies and corporate restructuring

Chisom Udechukwu
In the face of rapid globalisation, the fundamental objective of corporate restructuring is to reposition an organisation against the high tide of business failure and maximise shareholder value. Some obvious reasons for corporate restructuring include the need for greater competitiveness, increased profitability, diversification and/or compliance with regulatory or statutory provisions.

Corporate restructuring is typically divided into two main categories differentiated in terms of expansion or divestment technique. Srivastava and Mushtaq argue in the Asian Journal of Technology & Management Research (Vol. 01 – Issue 01, Jan–Jun 2011) that expansion techniques include mergers, takeovers, franchising, intellectual property rights acquisitions and holding company arrangements, whereas divestment techniques encompass sell offs, de-mergers, slump sales, management buy-outs, arrangements on sale and compromise. They argue for a third class of restructuring which includes share repurchasing, management buy in, reverse merger and equity carve-out.

In recent times, the holding company (HoldCo) model appears to be the preferred mode for reorganising businesses in Nigeria. Under this structure, the HoldCo acquires a controlling interest in a number of subsidiary companies (or sub-cos), and in turn operates either as a pure HoldCo that holds investments in the sub-cos or as an operating HoldCo that, in addition to holding investments in these sub-cos, carries on its own business.

The reorganisation of commercial banks in Nigeria pursuant to the 2010 Directive of the Central Bank of Nigeria to divest from non-banking activities further brings to light the workings of the HoldCo structure in Nigeria. The reorganisation was effected through a scheme of arrangement in which equity stakes in subsidiaries of the banks, as well as equity stakes in the banks were transferred to newly incorporated HoldCos. This restructuring model was adopted by Stanbic IBTC, First Bank Group, and a host of other banks in Nigeria. It is important to mention, however, that an alternative structure was advised by the Central Bank in which the existing bank would change its status to a HoldCo, while a subsequent company is incorporated to assume its assets, liabilities and responsibilities.

A company wishing to form a HoldCo must file an application with the Corporate Affairs Commission, supported by evidence of at least two subsidiaries. The application must also be supported by an updated annual returns of the subsidiaries and a statement that the HoldCo will acquire the majority of shares in the subsidiaries. In addition, the company must adopt a scheme of arrangement under section 539 of the Companies and Allied Matters Act which would enable the transfer of the shares, assets and liabilities of the subsidiaries in exchange for shares in the HoldCo.

The Inland Revenue Service permits HoldCos with at least 80% of the sub-co's voting stock to file consolidated returns with their sub-cos. Dividends received by the HoldCos in these circumstances are exempt from taxation. However, where the HoldCo owns more than 20% but less than 80% of the sub-co, the HoldCo can deduct 80% of the dividends received towards its taxation, while HoldCos with less than 20% of voting stock in sub-cos are eligible to deduct seven percent of the dividends received. This partial double taxation somewhat offsets the benefits a HoldCo with limited ownership retain, but the question whether the tax penalty is sufficient to offset other possible advantages is a matter that must be decided in individual situations.

Nevertheless, it is pertinent to note that the HoldCo model of corporate restructuring offers a number of benefits, including the convenience of management and control of sub-cos through its nominees who are directors of the sub-cos. The HoldCo model equally ensures a reduced risk exposure that secures the assets of the HoldCo and its sub-cos against claims of creditors of the other due to the doctrine of separate legal entity.

Although, for the most part, studies show that restructuring improves the performance of a corporation, the results vary with the chosen option. The HoldCo model remains a useful and commercially viable restructuring option as evidenced by the recent adoptions in the Nigerian banking industry. Its effectiveness is, however, not limited to a particular sector of the Nigerian economy.

Chisom Udechukwu

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