This article has been written by Vijaylaxmi Kedia pursuing a Diploma in US Contract Drafting and Paralegal Studies from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Corporate restructuring is a process that is undertaken to strengthen the financial stability of an organisation. The corporation, too, adopts the restructuring process in order to increase the shareholders’ fund and to separate different business verticals from one entity into a different entity, merging different businesses into a single entity, or acquiring businesses from other corporations. It adopts restructuring by way of amalgamation, merger, demerger, takeover, acquisition, joint venture, and buyback. As stakeholders, which include the management of the company, the company’s employees, creditors, debtors, shareholders, government and regulatory authorities, they all play a crucial role in corporate governance, and therefore it is the responsibility of the corporation to balance their interests while planning for corporate restructuring.

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The company needs to adopt proper strategies and communication tools to balance the interests of stakeholders in restructuring. Like in the case of corporate debt restructuring, the insolvency professional needs to evaluate the business of corporate debtors and based on the interests of creditors, employees and shareholders, it will be decided whether to adopt a rehabilitation or liquidation plan, which can balance all. If the corporation is not able to adopt a suitable strategy to balance the interests of stakeholders, it will have an impact on its reputation. A good strategy for managing stakeholder interest in restructuring will help the organisation survive long term in the market and help to create confidence among the employees, shareholders and creditors of the company.

Meaning of corporate restructuring, type of restructuring, type of stakeholders.

Meaning of corporate restructuring

Corporate restructuring is the term that means changing the structure of an organisation for its growth in terms of increasing its revenue, formulating better tax planning, increasing shareholder funds, splitting the operating business from an inoperative one, selling distressed assets and taking over the business of a competitor. Corporate restructuring can be done in different ways, which include changing the ownership of the company, splitting the different business verticals, changing the shareholding pattern, acquiring a new company and merging the company.

Type of corporate restructuring

Corporate restructuring is of various types, and it includes restructuring by merger, amalgamation, demerger, takeover, acquisition, corporate debt restructuring by restructuring in debt instruments, like reducing the rate of interest, extending payment terms and pre redemption of debt instruments, restructuring in securities particulars of secured debt instruments, and corporate insolvency resolution process for repayment to financial creditors by way of liquidation or rehabilitation. Issuance of shares, securities or buybacks, executing joint venture agreements, shareholder agreement and creating special purpose vehicles by making subsidiaries are the other modes of corporate restructuring.

Stakeholders in restructuring

Stakeholders are individuals or groups of people who have a major interest in a company, which includes management, financial and operational creditors, shareholders, employees, debtors, government and regulatory authorities, local body and other types of investors.

Understanding the interest of stakeholders in corporate restructuring

Stakeholders interest in corporate debt restructuring

Corporate debt restructuring usually happens when the corporate debtor is not able to meet its financial obligations to the creditor. In order to protect the interest of financial and operational creditors, its employees and shareholders, it is required to adopt a restructuring plan to maximise asset value of corporate debtors. Under corporate debt restructuring, the Committee of creditors (“CoC”) shall appoint an insolvency professional (“IP”) who is responsible for making plans for restructuring to protect the interests of financial creditors and other stakeholders, either by rehabilitation or by liquidation. While formulating the plan, IP should consider the interest of all stakeholders as well its employees. IP should consider that employees will get their wages and no employee should be retrenched in the case of rehabilitation or fully compensated in the case of liquidation.

Stakeholders’ interest in merger, amalgamation, demerger or takeover

In cases of merger, amalgamation or demerger, the shareholders of the company are concerned about their return on investment and their percentage of shareholding dilution; creditors are concerned about their recovery and terms of contract with the company; employees are generally concerned about their job security and compensation; suppliers are concerned about their business relationship; customers are concerned about the availability of quality products or services, and competitors are concerned about its impact on trade practices.

The restructuring by adopting takeover is commonly affecting stakeholders of the target company because, in some cases, its impact on stakeholders is negative. Under the takeover code, employees of the target company are always concerned about job security, new management and the new workmen’s policy; the shareholding of the target company’s minority shareholders is acquired by the majority shareholders without their consent; customers are focused on the quality of products due to changes in management; and competitors are concerned about the monopoly of the buyer company in a particular product.      

Recently, Tata Motors Limited’s (TML) Board of Directors approved the proposal for demerger of its commercial vehicles business and its related investment in one separate entity and passenger vehicles, including PV, EV and JLR businesses, including its related investment in another entity, in two separate listed companies. The impact of this restructuring is that shareholders of TML will continue to have the same shareholding in both newly listed companies. The objective behind a demerger will be to enhance the better experience of customers, increase the performance and outcome of employees and increase the shareholders’ fund.  

Stakeholders are interested in joint venture, shareholder agreement

In joint ventures (JV), two parties have entered into an agreement to complete a project, and in JV, the proportion of shareholding is an area of concern for the stakeholders of both parties.

In a shareholder’s agreement, the interest of existing shareholders is involved in the percentage of dilution in the issuer’s company.

Challenges in managing stakeholder relationships

  1. Difference in expectations and conflict of interest:
    • Stakeholders often have diverse expectations and goals, making it challenging to align their interests.
    • Managing conflicts of interest among stakeholders requires careful negotiation and mediation to ensure fair outcomes for all parties involved.
    • Balancing short-term and long-term objectives can be particularly difficult, as stakeholders may prioritise immediate gains over sustainable growth.
  2. Lack of stakeholder involvement:
    • Some stakeholders may show apathy or disinterest in participating in discussions related to restructuring planning and execution.
    • This lack of involvement can lead to poor feedback, inadequate input, and potential resistance during implementation.
    • Encouraging active participation from all stakeholders is crucial to ensuring a comprehensive and inclusive restructuring process.
  3. Cultural and ethical differences:
    • Stakeholders from different backgrounds may have varying values, beliefs, and norms.
    • These cultural and ethical differences can influence perceptions of restructuring planning, leading to misunderstandings and potential conflicts.
    • Recognising and addressing these differences is essential to fostering effective communication and collaboration among stakeholders.
  4. Stakeholder resistance and opposition:
    • Resistance and opposition from stakeholders can arise due to various reasons, such as:
      • Lack of trust in the leadership or management team.
      • Fear of change and its potential impact on job security, roles, and responsibilities.
      • Dissatisfaction with the proposed restructuring plan or perceived unfairness.
      • Conflict of interest with personal or organisational goals.
    • Managing stakeholder resistance requires transparent communication, addressing concerns proactively, and involving resistors in the decision-making process to gain their buy-in.

Strategy involved in balancing the interests of stakeholders

Identification of key stakeholders

While planning for restructuring, it is essential to identify your key stakeholders, whose interests are majorly affected due to restructuring, and make a priority list amongst them.

1. Stakeholders analysis:

  • Start by identifying stakeholders who will be directly or indirectly impacted by the restructuring. This may include employees, customers, suppliers, shareholders, investors, government agencies, and regulatory bodies.

2. Stakeholder mapping:

  • Once stakeholders are identified, map their interests, concerns, and potential influence on the restructuring process. This will help in understanding their perspectives and priorities.

3. Stakeholder prioritisation:

  • Prioritise stakeholders based on their level of impact, influence, and potential resistance to change. High-priority stakeholders are those who will be most affected by the restructuring and have the ability to influence its outcome.

4. Stakeholder engagement:

  • Engage with key stakeholders to gather their input, address their concerns, and build support for the restructuring. This can involve various communication channels like meetings, workshops, surveys, and one-on-one discussions.

5. Stakeholder management:

  • Develop a stakeholder management plan to outline communication strategies, conflict resolution mechanisms, and risk mitigation measures for each key stakeholder group.

6. Continuous monitoring:

  • Regularly monitor stakeholder relationships and address issues that arise during the restructuring process. This will help in maintaining stakeholder engagement and support.

By effectively identifying, prioritising, and managing key stakeholders, organisations can mitigate resistance, build consensus, and increase the chances of a successful restructuring.

Effective communication and transparency

Effective communication and transparency are required while delivering restructuring plans to stakeholders. There should be clear communication about the pros and cons of restructuring, the financial planning involved in restructuring, its impact on business and what made them decide to plan for restructuring. There should be clear communication to employees on the status of corporate restructuring and its impact on their jobs so that they can make a prior decision.

Negotiation and collaboration

Negotiation and collaboration with stakeholders to reach a fair deal are two of the strategies. While negotiating, we need to take care of the interests of all stakeholders, and we should not burden them with our plan and decision. We also need to identify the common benefit of all stakeholders and make a restructuring plan, considering the interests of all. We should try to convince stakeholders about the restructuring process by applying various techniques to reach an amicable situation.

Balancing the expectations of stakeholders and to be honest

We should make a plan that meets the expectations of stakeholders. We should clearly inform stakeholders about what can be done and what cannot be done in their interest. We should not make unnecessary promises to the stakeholders that, as we know, are not possible to fulfil. We should clearly inform them about the costs and benefits that will be involved in the restructuring process.

Monitoring and evaluating the restructuring process

It is paramount to effectively monitor and evaluate the restructuring process, which includes its benefits and losses to stakeholders. We need to monitor the progress of the plan and identify the lack of progress. We need to get feedback from stakeholders and reward them for their support of effective implementation.

Conclusion

Managing stakeholders’ interest in restructuring is one of the crucial tasks for achieving a successful restructuring outcome. Adopting a good strategy for balancing the interests of stakeholders will result in its long-term survival, building trust among the stakeholders, increasing the retention capacity of employees and attracting investors.

Overall, prioritising stakeholder needs and concerns and creating win-win solutions are key to navigating the complexities of corporate restructuring while maintaining strong stakeholder relationships.

References

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