Boosting operational sustainability is the key purpose of company restructuring in China, utilizing strategies that can prepare and ready enterprises to become flexible and agile.
Optimizing strategies that facilitate company restructuring can help businesses to rebound in the current difficult economic climate and to improve their operations in regard to supply chains, HR, and even finances.
Companies can attain a stronger market position with a successful restructuring strategy using improved operational efficiency to achieve their goals and come out the other side with a more dynamic way of doing business.
Determining the effectiveness of a China company’s external structuring strategy is not straightforward. It’s essential that stakeholders in the company interpret the plan and understand what makes it effective in the first place. With a solid understanding of the challenges that lay ahead during a company restructure, businesses can make the best strategic choices that ideally suit their company and goals moving forward.
Foreign investors in China have several options open to them regarding company restructuring strategies. Gauging and assessing the feasibility of these options is the only way to ensure you are taking the right strategic steps.
External Restructuring Overview
The definition of external restructuring is to restructure many parts of your business with company equity at the top of the list. Restructuring control rights and the assets you need to achieve the relevant business purposes that you are aiming to streamline are also important.
Companies that want to overcome financial issues and those that are attempting to improve their competitiveness by optimizing their investment portfolio can both benefit from a viable restructuring plan. In these instances, external restructuring strategies that include asset transfer, mergers, equity acquisitions, divestiture, split-ups, and other similar criteria should be your chosen path.
Understanding Equity Acquisition
The definition of ‘Equity Acquisition’ is a company that buys enough equity in another company and become its owner. It’s essentially attempting to buy enough equity to have the controlling stake.
The thing you need to bear in mind is that you will take on the liabilities and equity rights of the company which could also mean inheriting their current debts or any other associated liabilities they may have. These liabilities could be from the past actions of the business that are now your problem and responsibility.
A change in shareholders is a legal requirement of equity acquisition. Amending the licenses of the newly acquired company if they have different information is expected, especially in regard to any new legal representation that has been appointed after the transition of the acquired company has been completed.
The everyday operations of the company usually remain the same and the current employment relationship also remains unaffected if the whole acquisition process runs correctly. But if the company is going to relocate or changes its main business category, it could cause knock-on issues to operations or the employment status of the current staff.
Restructuring strategies like equity acquisition are ideally used by businesses who have acquired the capabilities of the company but have no plans to develop anything on the internal level or if they want to delve into a niche market without going through the hassles of the setting-up process.
When you become the controlling stakeholder in a newly acquired company, it allows you to get difficult-to-obtain licenses like permits for running schools. Taking advantage of the current experience and established framework of the company to put yourself in a better position in the current market conditions is also a major plus factor.
How effective your acquisition of the company largely depends upon the current condition of your company and the acquired one. Not all businesses are easily compatible and might have completely contrasting management styles, operational processes, and even varying work cultures and attitudes. These can all have negative knock-on effects and connotations.
Combining the two companies can be a major problem if they are not so pliable. Figuring out what is incompatible and doesn’t work is essential. By realizing these issues and acting swiftly, the acquiring company can quickly get a firm foothold in their preferred targeted market. And it can be even quicker if the two companies are more compatible.
You seriously need to perform your due diligence to find out if the companies are compatible beforehand so you can assess the potential efficiency going forward. It’s highly recommended that you perform due diligence on any pre-existing debt or credit issues, assets, contracts, management styles, employment relationships, disputes, and weaknesses and even expose any
sensitive areas of the acquired company. Understanding these factors beforehand can ensure that a transparent and fair transaction with sensible evaluations takes place.
Any foreign investors that acquire a domestic company in China have to convert it to a foreign-invested enterprise (FIE). By doing so, you must ensure that all the rules and regulations from
the FIE are followed in relation to the qualifications of the investors, their business scopes, and their restrictions on investment.
Understanding Asset Acquisition
The definition of an ‘asset acquisition’ is when a company is purchased via the buying of its valuable assets. These assets can include real estate, employees, current client relationships, machinery, or even its production line.
It largely involves taking on certain liabilities of the company. But the buyer gets to pick and choose the liabilities they take on as part of the negotiation process to get a viable price and deal. Because of these factors where you can decide the liabilities you assume, asset acquisition is a much safer acquisition strategy that protects the buyer. Selecting these liabilities, which can also include undisclosed and unknown liabilities, is a better option for the buyer, especially considering that not all liabilities can be uncovered via due diligence.
However, with asset acquisition, the tax burdens are much higher in comparison to those involved in equity acquisition. Where equity acquisitions are concerned, income tax is part of the equity transfers and on stamp tax that is caused by the contract. But with asset acquisition, it largely depends on the nature of the assets that were transferred, and that defines whether or not they need to pay VAT, deed tax, income tax, stamp taxes, and so forth.
When buyers only want to obtain the attractive assets of the target company but do not want to obtain the entire business operations, an asset acquisition strategy is the best option. In some cases, the buying company might also gain control over certain assets that are essential for the operations of the acquired company going forward and that is very similar to gaining the whole company.
Ensuring the effeteness of the asset transaction might need an asset appraisal depending on the nature of the transaction. This is largely used to assess a fair price for any assets transferred in the acquisition and also to assimilate the potential risks that can ensure a successful asset transfer where mortgage rights are concerned and are part of the assets you are targeting.
In this instance, it’s required that you instigate a due diligence process to ensure everything is above board and in line with your strategy.
Some changes to certain licenses could happen after an asset acquisition regarding the assets being immovable or some kind of special equipment that needs very specific licenses. And that can also lead to some staffing problems as well.
In a situation where the acquiring company wants to take on only certain valuable assets pertaining to facilities, equipment, and land without taking on the staff, the acquisition might lead to major layoffs of current employees as the company will cease operations once the assets are sold off. The acquiring company can choose to include HR in their acquisition and then might need to negotiate with the employees, especially if there is a potential relocation involved.
Acquiring companies that inherit staff through the process could have ongoing issues and disputes if the employees have working contracts that have long periods with the company that has been acquired. Reaching a deal or some kind of agreement between the buyer and seller that covers any potential HR and staffing issues is advised in this situation.
One of the more popular strategies to restructure a company in China is by utilizing merger options. They are very similar to equity acquisitions in many ways. But in this instance, the merger combines the two companies instead of the buying company purchasing enough equity to become the controlling stakeholder as we find in equity acquisition strategies.
A merger usually takes place when both companies are of similar size and stature, scope, and operational capabilities. The overriding reasons to merge are usually about gaining a greater market share, improving costs across the board, reducing competition in the market, or increasing profits.
Mergers can help how the two companies are managed and that can allow them to have a greater synergy in the way the company is organized going forward and that gives confidence to the newly formed alliance to take more control over the market that they couldn’t achieve by themselves.
The simplicity and cost-effeteness of the mergers make it a viable alternative in comparison to the other acquisition options. However, the boards of the two companies in question must agree upon the conditions of combining the two businesses, and also other key terms in the merger.
The two companies involved in the merger do not need to legally liquidate or de-register their licenses and so forth. But they may have to perform tax deregistration by local tax bureaus in some cases.
Merger deals can sometimes be on an all-stock bases and if so, the value of shares of the new company needs to be the same for shareholders from both the older companies and they will have no tax liability. But even then, the effectiveness of this merger will largely depend on the compatibility of the two companies, which makes it very similar to equity acquisition strategies.
The definition of a ‘split-up’ is that of a restructuring option where one business wants to divide itself into two or even more companies that will be run and operated separately from each other.
There are a couple of reasons why a split-up would be a good option. The first is very strategic and can be used to gain an advantage in the marketplace, while the second reason is to ensure compliance with government mandates that cover monopolistic practices. The former of which is far more common than the latter.
In regards to using a split-up for strategic advantage purposes, separating and managing lines of business individually could result in greater profits and higher efficiency for both. But in this case, both of the companies would need to have their own resources and cannot club them together. They will need their own management personnel and capital financing teams. This is mainly because certain individual departments can help a company grow quickly and strengthen by separating the focus and requirements.
In many cases, it might be more viable for a company to set up a new subsidiary instead of going through the arduous process of a company split up because splitting the rights, assets, and liabilities can be a serious hassle.
Understanding Divestiture Strategies
The definition of a ‘divestiture’ restructuring option is when a business wants to reduce redundancy and generate funds to help their company survive by disposing of certain non-core and non-performing assets or business units.
Divestiture strategies are the opposite of mergers and acquisitions in respect to offloading certain underperforming assets as opposed to acquiring the assets of another company to gain advantages. The main avenue to obtain divestiture is to sell off assets and equity or split up or even file for bankruptcy.