How to Handle Legal Compliance During Corporate Restructuring

Corporate restructuring is a complex process that involves significant changes to a company’s structure, operations, or finances. It can be driven by various reasons, such as mergers, acquisitions, spin-offs, or financial difficulties. While restructuring can offer strategic advantages, ensuring legal compliance is crucial to avoid potential legal risks and penalties. Here’s a guide on how to handle legal compliance during corporate restructuring in the Philippines.

1. Identify the Type of Restructuring

Before diving into legal compliance, it’s important to first identify the type of restructuring you are undertaking. Different types of restructuring will require specific legal steps and documentation:

• Merger or Acquisition: Combining two companies into one or acquiring a new company.
• Divestiture or Spin-Off: Selling off or creating a separate entity from part of the existing company.
• Internal Reorganization: Adjusting the internal structure without external transactions, such as consolidating departments or shifting management.
• Debt Restructuring: Renegotiating debt terms due to financial distress.

Each type of restructuring comes with its own set of legal requirements and compliance issues.

2. Consult with Legal and Financial Advisors

Corporate restructuring can have wide-reaching implications, including changes in shareholder rights, employment contracts, and regulatory obligations. Consulting with legal counsel and financial advisors ensures that you address all areas of legal compliance, including tax, corporate governance, labor laws, and contractual obligations.

• Corporate Lawyers: Help draft the necessary documents and guide the company through regulatory filings and compliance.
• Financial Advisors: Assist in analyzing the financial aspects of restructuring, ensuring compliance with tax regulations, and evaluating the impact on shareholders.

3. Comply with the Securities and Exchange Commission (SEC) Requirements

For companies registered with the SEC, compliance with corporate governance regulations is critical during restructuring. Specific steps may include:

• Filing a Notice of Restructuring: Inform the SEC of the intended restructuring plan, including mergers or acquisitions. Depending on the nature of the restructuring, this could involve amending the Articles of Incorporation and Bylaws.
• Shareholder Approval: Obtain shareholder approval through a general meeting. Major changes in company structure or ownership often require approval from at least two-thirds of the shareholders.
• Amendments to Corporate Documents: For significant changes such as mergers or a change in the company’s capital structure, amendments to the Articles of Incorporation and Bylaws must be approved and filed with the SEC.
• Submission of a New General Information Sheet: Reflecting changes in ownership structure, board members, or officers following the restructuring.

4. Ensure Tax Compliance

Tax considerations are critical during any corporate restructuring, as the Bureau of Internal Revenue (BIR) has stringent tax laws that must be followed. The BIR must be notified of any changes that affect taxation, and companies should ensure that they comply with the following:

• Capital Gains Tax: If restructuring involves the sale or transfer of shares or assets, capital gains tax may apply.
• Documentary Stamp Tax: Changes in the issuance of shares or transfer of assets during restructuring may be subject to documentary stamp tax.
• Tax Clearance: Ensure that the company has no outstanding tax liabilities before proceeding with the restructuring.
• Post-Reorganization Tax Filings: After the restructuring, ensure that tax returns and financial statements accurately reflect the new structure and meet all BIR reporting requirements.

5. Comply with Labor Laws and Employment Contracts

Restructuring often affects employees, and compliance with labor laws is essential to avoid disputes and legal liabilities. Under Philippine labor laws, employers are required to:

• Notify Employees: Inform employees of any changes in their employment terms due to restructuring, such as reassignment, redundancy, or termination.
• Redundancy Payments: If the restructuring leads to layoffs or job elimination, companies must comply with the rules on redundancy and pay affected employees the appropriate separation pay.
• Consultation with the Department of Labor and Employment (DOLE): Notify DOLE if mass layoffs or significant changes in employment contracts occur, especially in large corporations.

6. Review and Update Contracts

Corporate restructuring may involve changes in business operations, which could affect existing contracts with suppliers, customers, and other third parties. It is essential to review all contracts to identify potential compliance issues and renegotiate terms if necessary. Ensure that:

• Contractual Obligations: Existing contracts are honored during and after restructuring unless legally terminated or amended.
• Change of Control Clauses: Some contracts may contain “change of control” provisions that require renegotiation or termination if the ownership or structure of the company changes.
• Legal Notices: Notify counterparties of the restructuring and seek any necessary consent for continued contractual performance.

7. Comply with Competition Laws

If the restructuring involves mergers or acquisitions, you may need to notify the Philippine Competition Commission (PCC) under the Philippine Competition Act. The PCC reviews mergers and acquisitions to ensure they do not substantially lessen competition. Key considerations include:

• Threshold Requirements: If the transaction exceeds certain financial thresholds, you must notify the PCC and seek approval before finalizing the restructuring.
• Antitrust Review: The PCC will review the transaction to ensure it does not create monopolistic practices or result in unfair competition.

Failure to comply with PCC regulations can result in the unwinding of transactions and significant penalties.

8. Ensure Data Privacy Compliance

Restructuring often involves the transfer of sensitive data, including employee, customer, and financial information. Companies must comply with the Data Privacy Act and ensure that proper safeguards are in place during the restructuring process. This includes:

• Notifying the National Privacy Commission (NPC): Inform the NPC if the restructuring involves significant data processing or transfer.
• Updating Privacy Policies: Ensure that privacy policies and data-sharing agreements reflect any changes due to restructuring.
• Secure Data Transfers: Implement secure measures for the transfer of sensitive data to new entities or divisions.

9. Consult with Shareholders and Stakeholders

Corporate restructuring can have a profound impact on shareholders and other stakeholders. It is essential to maintain transparency and consult with them at every stage:

• Shareholder Meetings: Hold regular meetings to inform shareholders about the restructuring, obtain approvals, and address concerns.
• Investor Relations: Keep investors informed through regular updates to maintain trust and avoid legal disputes.
• Stakeholder Impact Assessments: Assess how the restructuring affects creditors, suppliers, and other third parties and address their concerns.

Conclusion

Corporate restructuring is a complex process with numerous legal considerations. Proper planning and execution are essential to ensure compliance with regulatory requirements, minimize legal risks, and protect the company’s long-term interests. Seeking the guidance of legal professionals and compliance experts at each stage of restructuring is crucial to ensure that all legal obligations are met and that the restructuring is carried out smoothly.