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Business Restructuring in Malaysia: The Five Most Common Mistakes and How to Avoid Them

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Business Restructuring refers to making significant changes to a company’s organisational structure to improve its performance, adapt to changing market conditions, or address financial or operational challenges.

The primary purpose of business restructuring is to ensure the long-term success and sustainability of the organisation.

Reasons for Business Restructuring

Some common reasons for business restructuring include:

  • reducing costs,
  • improving efficiency and productivity,
  • expanding into new markets,
  • divesting non-core assets or businesses,
  • merging with or acquiring other companies,
  • pre-IPO restructuring to comply with legal or tax rules. or
  • other reasons.

The Importance of Business Restructuring

The ultimate goal of business restructuring is to create a more agile and competitive organisation better equipped to succeed in today’s rapidly changing business environment.

Therefore, experts and consultants from different professional fields may be involved in a business restructuring.

Apart from tax and accounting services, the project may also require the support of legal advisory teams from different jurisdictions and professional fields, such as corporate law, financial law, intellectual property law, and labour law, among others.

While all parties involved in the business restructuring project make efforts to ensure smooth progress, this article will focus on potential areas of error, particularly the less noticeable mistakes that can occur in the absence of professional consultants.

Common Mistakes During Business Restructuring

Some errors may only cause minor inconveniences, but others could lead to serious problems.

1. Lack of clear goals and objectives

Certainly, a lack of clear goals and objectives is a common reason why business structuring can fail. When a company does not have a clear direction or purpose, it becomes difficult to design an appropriate business structure supporting its growth and development.

Without clear goals and objectives, it is challenging to determine the appropriate legal entity, ownership structure, and management hierarchy.

The lack of clarity can also lead to a lack of focus and alignment among the team members, resulting in ineffective decision-making, poor communication, and inefficiencies.

Additionally, without clear goals and objectives, attracting investors, securing financing, or negotiating partnerships can be challenging. Potential partners or investors want to see a clear vision and a well-thought-out plan before they commit their time and resources to a project.

Therefore, it is essential to establish clear and measurable goals and objectives before embarking on any business structuring process. This will ensure that the company’s legal, financial, and operational structures align with its overall vision and objectives, which is critical to its success.

2. Failure to obtain adequate tax advice and failure to develop a restructuring plan

Generally, tax (and subsequently legal) architecture documents or step plans are the basis or “roadmap” for a business restructuring project.

The step plan lists the restructuring objectives and the relevant legal entities involved and chronologically records the planned implementation steps.

More importantly, the document explains the significant tax impacts or losses arising from the proposed steps and the legal consequences.

This is crucial for evaluating the risks of implementing the restructuring or considering other measures to reduce or mitigate the associated risks.

Common tax issues arising from business restructuring projects include:

  • real capital gains tax (on the direct or indirect transfer of assets);
  • stamp duty arising from transferring assets or shares;
  • indirect taxes (such as goods and services tax or value-added tax); and
  • Withholding tax.

Without a proper tax and legal step plan (whether a brief plan or a detailed restructuring analysis document), the project team may have difficulty identifying the documents required for project implementation and predicting potential implementation difficulties.

In addition, if tax and legal issues and their risks are not fully considered, there may be unforeseen risks in the future, which may require correction of some original steps or further negotiations.

For example, if business divestiture is only carried out later, the remediation mechanism is often more complex than if it had been properly implemented.

3. Failure to conduct a legal feasibility assessment

The lack of involvement of a legal advisor or the late involvement of a legal advisor throughout the process can seriously affect the proper adjustment of steps and the timing of their execution.

For example:

Failure to verify the terms of important contracts and articles of association or constitution.

The direct or indirect change of control or equity changes in the restructuring process may trigger changes in control provisions, resulting in the automatic termination of contracts or giving the other party the right to terminate related contracts.

Similarly, the existing articles of association of relevant entities may not allow for implementing certain proposed steps, such as capital reduction, the distribution of assets in kind or dividends, the change of share capital, or prohibiting certain borrowing categories.

Failure to comply with the constitution, articles of association, or legal requirements may render the transaction invalid or revocable and expose the entities and directors concerned to the risk of claims by shareholders and third parties (such as creditors).

Failure to address minority equity issues in the structure, especially in cases where the business restructuring project involves the distribution of assets or shares through a controlled entity chain and where one or more entities in the entity chain hold minority equity.

In addition, the enterprise also needs to check the rights of all parties under shareholder agreements, joint venture agreements or other similar shareholder governance documents, take these rights into account and obtain necessary or appropriate consent.

Providing inadequate or inappropriate consideration or value for the transfer of non-cash assets.

Transfers made free of charge or without adequate consideration also raise tax and legal issues.

In the case of consideration, the consulting team also needs to consider how to value assets in advance (such as net book value or fair market value) and whether other requirements need to be met.

Mistakes in this area may lead to directors breaching their obligations under company law and causing problems in the event of entity bankruptcy.

The transfer consideration may also impact the amount of any relevant income tax and transfer tax.

4. Unnecessary Complexification of Restructuring Steps

Unnecessary complexity can increase the time and cost of implementation.

The fundamental principle to always follow is to achieve the final structure with the simplest possible restructuring steps and to increase complexity only when necessary to address specific issues (practical, tax, legal, accounting, or other issues).

However, determining what is the “simplest” approach can sometimes be challenging.

Piecing together advice from different advisors on specific issues can also lead to overly complex restructuring steps, resulting in implementation difficulties, high costs, lengthy timelines, or, even worse, potential conflicts between steps.

Therefore, it is crucial to provide accurate work instructions to those cooperating advisors and to appoint a lead advisor responsible for managing the overall planning and implementation of the restructuring work.

(The workload involved in legal project management or the value an experienced Business Restructuring leadership team can add to a project should not be underestimated – see the discussion below on this common mistake.)

5. Underestimating the Workload of Project Management

Business Restructuring projects are often seen as a series of simple steps. Because each step seems simple, it is easy to assume that the Business Restructuring project should be simple too.

Unfortunately, such situations are rare. As the number of steps, entities, jurisdictions, and advisors increase, Business Restructuring projects often become exponentially more complex with each factor.

This misconception sometimes leads to companies conducting Business Restructuring projects on their own or with their corporate secretariat teams without hiring lawyers specialising in Business Restructuring work.

A medium-sized Business Restructuring project may require hundreds or even thousands of legal implementation documents, each applying different laws and drafted by different teams, which is not uncommon.

Although many of these documents may be straightforward, managing the opinions of the client team and each relevant advisor (such as tax, legal, accounting, and any related sub-specialities and jurisdictions) and ensuring a consistent approach based on the proposed steps is always a critical workflow.

Underestimating the workload of project management can lead to rushed or missed deadlines, which can have disastrous consequences (sometimes with hard deadlines set, for example, due to tax regulations changes and their impending effective dates).

Similarly, sometimes corporate groups overlook the feasibility of supporting project management, delivery standards, and/or efficiency using technology and/or scalable delivery solutions.

7. Failure to consider the accounting treatment of transactions

Although this point is sometimes seen as an afterthought or a post-transaction requirement (which is why it is listed last in this article), failing to consider the accounting treatment of transactions can result in a transaction being legally and tax-wise feasible but incorrect from an accounting perspective, or may have unforeseen impacts in the future.

As mentioned above, failure to properly consider accounting guidelines regarding distributable profits may result in a breach of relevant company law, particularly for transactions described as “deemed” or “actual” distributions from an accounting or legal perspective.

In practice, a company’s contribution to its indirectly held subsidiary may inadvertently create issues with local company capital distribution or merger reserve accounts.

This can trap cash within the relevant entity and lead to ongoing confusion, requiring consultation with specialist advisors to rectify at a further cost.

It is typically worthwhile to have an accounting advisory team provide guidance on the accounting treatment of each step early on in the project (before accounts are finalised and submitted for audit).

Otherwise, correcting these issues after the audit cycle for the restructuring may end up being extremely difficult.

Conclusion

In conclusion, the failure of business restructuring can be attributed to several factors, including a lack of clear goals and objectives, inadequate communication, insufficient planning, resistance to change, and overlooking the accounting treatment of transactions.

To ensure the success of a restructuring project, it is essential to consider each factor carefully and develop a comprehensive plan that addresses them.

This plan should involve key stakeholders from all areas of the business and should include a thorough feasibility study that considers legal, tax, accounting, and valuation implications.

By taking these steps, businesses can avoid the common pitfalls of restructuring and increase their chances of achieving their desired outcomes.

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