November 2012 - Holding Companies

November, 2012
LP
GENERAL COUNSEL
Corporate & Commercial Group© Aina Blankson, LP, 2012
HOLDING COMPANY AS A TOOL FOR
CORPORATE RESTRUCTURING
Introduction
n the face of rapid globalization and an ever
changing corporate landscape that thrives on
Icompetition and survival of the fittest, the
fundamental objective of corporate restructuring is
to continually reposition an organization against the
high tide of business failure, and maximize
shareholder value.
Corporate restructuring, whether internal or external,
is the modification or alteration of the business
1
outlook of a company . According to Crum and
Goldberg, corporate restructuring is “a set of discrete
decisive measures taken in order to increase the
competitiveness of the enterprise and thereby
2
enhance its value .” These changes occur based on
the needs of the company, and can take the form of a
change in a company's legal status, ownership,
operations, or a financial restructuring.
The holding company (“HoldCo”) structure, describes
a corporate restructuring approach where the
HoldCo owns sufficient interests in a number of
subsidiary companies as to enable it direct and
control their ownership and business operations. In
1
Nelson C.S. Ogbuanya: Essentials of Corporate Law Practice in
Nigeria published in 2010.pg 581
2
Hailemariam Stifanos, “Corporate Restructuring and Value
Creation”, CORPORATE VALUE CREATION, GOVERNANCE AND
PRIVATISATION, 2001

some cases where the HoldCo wholly owns
companies, the structure allows it to control several
related but independent companies, hence
encouraging diversification of risk. The HoldCo
arrangement has the capacity to make venturing
outside an organization's core industry possible, and
under certain conditions, a HoldCo may benefit
from tax consolidation, sharing of operating losses,
3
and ease of divestiture .
This Newsletter examines the reasons for corporate
restructuring, the different restructuring models,
and in the light of banking sector reforms in Nigeria,
concludes with an analysis of the HoldCo structure.
It also examines the tax implications of the Holdco
model and offers some comparison with the United
Kingdom model.
Corporate Restructuring Rationale
As competition increases the struggle for businesses
to stay relevant, the need to downsize and write off
losses while adopting new management and
operation system that encourage growth becomes
paramount. Repositioning a company for
competitiveness, increased profitability, surviving
adverse economic climate, diversification or
compliance with regulatory or statutory
requirements are some of the reasons for
implementing a corporate restructure.
Companies experiencing downward trends in
operations and profits, and desiring to continue
profitably most often restructure their business
operation for better capital flow and efficient
management. Similarly, companies may embark on
diversification or spin off existing businesses, which
typically serve as a hedge against business failure or
to maximize returns. This is common in
conglomerates which often diversify or spin off
existing businesses with potential of yielding profits
thus spreading its risks across board.
In addition, the need for statutory or regulatory
compliance often compels companies operating in
specific industries to restructure their business. For
instance, the 2005 directive by the Central Bank of
Nigeria (“CBN”) for banks to increase their capital
base from N2 billion to N25billion brought about a
wave of restructuring among several banks in
Nigeria. Similarly in 2010, the CBN directed
commercial banks to divest from their non-banking
subsidiaries, as the country moved away from the
Universal Banking model which had been in
existence for 10 years. In the same vein, the National
Pension Commission in 2011 directed licensed
Pension Fund Administrators to shore up their
capital base from N150 million to N1 billion. These
are instances where several restructuring exercises
were undertaken by the affected institutions to
ensure compliance with regulatory directives.
Restructuring Models
Corporate restructuring is typically divided into two
major categories – although the number of options
available indicates that such classification may
altogether be unnecessary. The possibility of
combining different options under a particular
restructuring exercise equally renders such
classification redundant. Vikas Srivastava & Ms.
4
Ghausia Mushtaq delineate the forms of
restructuring into the expansion and divestment
techniques. According to the writers, expansion
techniques include mergers, takeovers, joint
LP
3
http://www.businessdictionary.com/definition/holding-
company.html.
4
Vikas Srivastava & Ms. Ghausia Mushtaq, “Corporate
Restructuring – A Financial Strategy”; Asian Journal of Technology
& Management Research, Vol.1 – Issue 1 2011.

LP
ventures, strategic alliances, franchising, intellectual
property rights (IPRS) and holding companies;
divestment techniques encompass the full breadth
5
of sell offs, de-mergers , slump sale, management
buy-outs, leveraged buy-outs, liquidation,
arrangement on sale as well as arrangement and
6
compromise . They further argue for a third class of
restructuring which includes forms such as share
repurchasing, management buy in, reverse merger
and equity carve-out.
In like measure, restructuring can be internal or
external. While internal restructuring involves an
alteration of the company structure by the company
and its members without recourse to third parties,
external reconstruction involves third party
intervention. A hybrid of these models can be
adopted within legal frameworks in different
jurisdictions, such that a divestment technique may
be done internally or externally, thus straddling both
forms of restructuring.
Holding Company Technique
Under Nigerian law, a HoldCo is one which is a
member of another company and controls the
composition of its Board of Directors or holds more
7
than half in nominal value of its equity share capital .
In essence, the HoldCo has a controlling interest in a
number of subsidiaries, whether in a particular sector
or in various industries. HoldCos can either be “pure”,
existing only as an investment company, with
controlling interest in other companies; or as an
“operating” holding company, which in addition to
holding interests in its subsidiaries carries on
business as a company.
Some of the unique advantages that a HoldCo model
confers include:
Management & Control – The power of
control is vested by virtue of the HoldCo's
ownership of an influential amount of shares
and is exercised through the directors of the
subsidiary companies who are its nominees.
From a management point of view, the
parent-subsidiary relationship of holding
companies allows for decentralized
management. While each subsidiary retains
its own management team, the HoldCo sets
corporate policies for all subsidiaries
without interfering with individual
management.
Reduced Risk Exposure – HoldCos and their
subsidiaries are considered separate legal
entities, so that the assets of the parent
company and the individual subsidiaries are
5
This is the division of a company with two or more business units
which may have similar operations into two or more separate
companies. This is sometimes referred to as a split-up.
Oftentimes, the parent company is liquidated after exchanging
the stocks of the subsidiaries for the parent's stock.
A spinoff is said to occur through a distribution of the
shareholding of a wholly owned subsidiary among the
shareholders of the parent company on a pro rata basis. As a
result, a new company is formed with the same ownership basis as
that of the parent company. There is no revaluation of the
subsidiary's assets and no money exchange; with the transaction
being a tax-free exchange as the exchange is treated as a stock
dividend.
6
A similar, but more detailed approach is taken by Weston J. Fred
et al, in “Restructuring and Divestiture”, TAKEOVERS,
RESTRUCTURING AND CORPORATE GOVERNANCE (Second
Edition), Prentice Hall, page 229; where he identifies four
restructuring frameworks, and thus groups the various
restructuring models into different classes. In this regard, he
presents the following: 1. Reorganisation of assets: acquisitions,
sell-offs or divestitures; 2. Creating new ownership relationships:
split-ups, equity carve-outs, spin-offs;3. Reorganising financial
claims: bankruptcy, financial reorganisation, exchange offers,
dual-class recapitalisations, liquidation; 4. Other strategies: joint
ventures, going private (LBOs, MBOs), share repurchase
programs, Employee Stock Ownership Plans (ESOP) and Master
Limited Partnerships (MLP).
7
See section 388, Companies and Allied Matters Act, Laws of the
Federation of Nigeria 2004.

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protected from creditors' claims against the
other, while the risk of the HoldCo is tied to
its capital investment in the subsidiary.
While being sheltered from the tax liabilities
and law suits that attach to the subsidiaries,
the HoldCo typically benefits from the
goodwill and reputations of the subsidiaries.
Notwithstanding, the HoldCo may be
compelled to make good on the subsidiaries
debts in order to retain goodwill as was the
case when the United States Consumer
Financial Protection Bureau ordered
American Express to pay $85Million refund
to consumers harmed by the illegal
practices of some of its subsidiaries between
8
2003 and 2012 . While this may be
considered a shortcoming of the system, it
only serves to highlight the importance of
the HoldCo in corporate restructuring. In
other circumstances, a HoldCo may choose
to operate as a single economic entity with
its subsidiaries for the purpose of filing
consolidated financial statements.
Creditworthiness – Credit distinctions
between a HoldCo and subsidiary debt are
important as differentials in risk translate
into pricing. Once a consolidated group
credit is assessed, typically the strongest
entity within the group receives a rating
equivalent to the consolidated credit quality.
As such, depending on the relationship
between the HoldCo and subsidiaries,
ratings of weaker subsidiaries could be
enhanced by that of the stronger company
or HoldCo, where it is an operating
company. A variety of factors however affect
the rating of the HoldCo and subsidiaries'
credit profile, such as degree of ownership
and control, insulation, strategic
importance and dependence of the
9
subsidiaries .
Convenience: As a restructuring model, the
HoldCo is convenient and inexpensive as
there is continuity of operations for the
different subsidiaries. It is also a legally
easier route in most jurisdictions. In Nigeria
for example, the statutory requirements
and procedure for a HoldCo is less
cumbersome than that of a merger,
arrangement on sale, and other
restructuring models. The HoldCo model
also has minimal or no effect on the
shareholders as well as the employees of
the subsidiaries as opposed to other forms
of restructuring. This is because for
shareholders, their shares in the subsidiary
are transferred to the HoldCo, making them
shareholders of the HoldCo; or cancelled,
with the shareholders receiving payment for
the value of their shareholding where
transfer proves difficult.
Illustrations
A classic example of a successfully managed
holding company is Berkshire Hathaway
Incorporated (“Berkshire”), which was an
outcome of a merger between Hathaway
Manufacturing Company and Berkshire Fine
10
Spinning Associate Inc in the 1950s . When
in 1962 Warren Buffett bought shares in the
company and subsequently became the
8
American Express was further fined an additional $27.5Million
by Federal Regulators. See
http://www.thestreet.com/story/11723783/1/american-express-
hit-with-113-million-fine.html, and
http://www.marketwatch.com/story/amex-to-pay-113-mln-for-
illegal-practices-us-2012-10-01 last accessed November 2012.
9
Standard & Poor's: Ratings Direct, August 29 2000
http://www.maalot.co.il/data/uploads/pdfs/1.parent_and_subsidi
ary_ratings.pdf, Last accessed November 2012
10
http://www.buffettsecrets.com/berkshire-hathaway.htm Last
accessed November 2012

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largest shareholder, it spun a wave of
investments in the United States insurance
industry, until acquiring legendary HoldCo
status with investments in over 33 different
11
companies spread around multiple sectors .
A further example is Nippon Telegraph
Telecommunication (“NTT”), a Japanese
telecommunications company that made
the transition to private company in 1985,
12
and became a holding company in 1999 . Its
share price witnessed a substantial increase
of about 22% within two months, as share
price subsequently reached a high of
13
1,540,000 yen . Its restructuring was to
intensify its goal of global competition and
expansion of interest in broader
telecommunications areas. The company
currently has over six subsidiaries with
14
interests extending to real property .
The restructuring of the Everest Re Group
Ltd, a Bermudan financial holding company
is also worthy of mention. In 1995,
Prudential Insurance Company of America –
the parent company of Prudential
Reinsurance Company (Prudential Re) –
completed a public offering of Prudential
Re, changing its name to Everest
Reinsurance. A corporate restructuring at
the HoldCo level in February 2000 meant
that the Everest Re Group Limited emerged
as the new publicly owned parent of the
group. Holders of shares of common stock
of the Everest Reinsurance automatically
became holders of the same number of
16
common shares of the holding company .
In Nigeria, the HoldCo restructuring model
was adopted by Stanbic IBTC Holdings, as a
result of the Central Bank of Nigeria (“CBN”)
17
Regulation of 2010 (the “Regulation”),
which abolished universal banking and
required banks to divest from non-banking
activities with a view to engaging in either
commercial or specialized banking.
Prior to the restructuring, Stanbic IBTC Plc
(the “Bank”) wholly owned about six
subsidiaries with objects ranging from asset
management, stock brokering, pension
management, investment banking and
trustees among others. In a bid to comply
with the CBN directive, the Bank adopted
the HoldCo model and incorporated a pure
holding company known as Stanbic IBTC
Holdings PLC (“Stanbic Holdings”) in March
2012. Equity stakes in all subsidiaries of the
Bank were transferred to Stanbic Holdings,
which invariably held an interest in the Bank.
The reorganisation of Stanbic IBTC Plc under
the HoldCo structure was carried out
through a Scheme of Arrangement
incorporating a reduction in the share
capital of the Bank, pursuant to Sections 539
& 106 of CAMA respectively. The bank
11
Ibid.
12
MPRA Paper No. 27349, “Corporate restructuring issues in the
holding company structure – The NTT Case in Japan.” 01
December 2010. Available at http://mpra.ub.uni-
muenchen.de/27349/
13
Ibid
14
Ibid.
15
http://seekingalpha.com/symbol/re/description Last accessed,
November 2012
16
Ibid.
17
Scope of Banking Activities & Ancillary Matters, No 3 2010.

LP
subsequently delisted from the Nigerian
Stock Exchange and the HoldCo was
thereafter listed on the Exchange. The
approval of the South African Reserve Bank
was sought along with the approval of the
CBN towards a successful restructuring. The
Bank has successfully completed its
reorganisation and is now a subsidiary of
Stanbic Holdings, along with its previously
owned subsidiaries.
First Bank, First City Monument Bank and
Union Bank also adopted this option in
compliance with the CBN directive.
Operating a HoldCo in Nigeria
To operate a HoldCo in Nigeria, the proposed
HoldCo must file an application for consent with the
Corporate Affairs Commission (“CAC”) which must
be supported by evidence of at least two
subsidiaries, a statement that the holding company
will acquire the majority of shares in the subsidiaries
18
and updated annual returns of the subsidiaries . The
transfer is done by a Scheme of Arrangement under
Section 539 of CAMA, which involves the transfer of
the shares, assets and liabilities of the company to
the newly incorporated HoldCo in return for shares
in the HoldCo. The HoldCo must seek approval-in-
principle from the Nigerian Securities and Exchange
Commission and thereafter apply to court for a
court order convening a general meeting to approve
the Scheme. The resolution approving the Scheme
must also be sanctioned by the court and filed at the
CAC.
If the HoldCo owns at least 80% of a subsidiary's
voting stock, the Inland Revenue Service permits the
filing of consolidated returns, in which case
dividends received by the parent company are not
taxed. However, if less than 80% of the stock is
owned, then the tax returns cannot be consolidated.
In such circumstances, parent companies that own
more than 20% but less than 80% of another
corporation can deduct 80% of the dividends
received, while those that own less than 20% may
deduct only 70% of the dividends received. This
partial double taxation somewhat offsets the
benefits of a HoldCo with limited ownership, but
whether the tax penalty is sufficient to offset other
possible advantages is a matter to be decided in
individual situations.
In the United Kingdom, a HoldCo must be a trading
company or a holding company of a trading group,
and also hold at least 10% of the ordinary share
capital of the subsidiary for a continuous period of at
19
least 12 months .
All dividends paid by a subsidiary to a UK parent
company are subject to corporate income tax.
20
However UK grants double tax relief by way of a
credit for foreign corporation tax underlying the
dividends provided that the UK Company holds,
directly or indirectly, at least 10% of the share capital
21
of the distributing company . If the foreign company
is subject to a corporate tax rate of 30% or more, the
credit will usually be a complete relief from UK
22
corporation tax . Dividends received from other UK
18
http://hybridsolicitors.hubpages.com/hub/Registeration-of-
Companies-NGOs-Churches-Trademarks-in-Nigeria-A-Z Last
accessed November 2012
19
GR Morgan Formations; UK Holding Companies -
http://www.ukincorporation.co.uk/incorporation/uk/ last
accessed November 2012.
20
Ibid
21
Ibid. See also Manivest Fact Sheet available at
http://www.manivestasia.com/library/factsheet/uk/FACT_SHEET_
UK_Holding_Company_eng.pdf last accessed November 2012.
22
Ibid

companies are exempt from corporation tax and
23
withholding tax . Further, non-UK withholding taxes
paid on dividends received by the UK company, and
foreign taxes paid on profits from which the
dividends are paid can be set off against UK
corporation tax liabilities provided the UK company
owns not less than 10% of the share capital of the
24
dividend-paying company. Therefore in cases
where the UK company owns a 10% stake in an
overseas company, foreign taxes incurred on
overseas trading profits are fully deductible against
25
corporation tax in the UK .
Conclusion
Although for the most part studies show that
restructuring improves performance of a
corporation, the results vary with the methods
chosen by the company and the effectiveness of
their initiative. Some argue that governments and
financial sector regulators have always been
concerned about the multi-layering of a corporate
structure through a web of special purpose entities
and intermediate holding companies. They are
regarded as impediments to effective supervision,
particularly where the intermediate companies do
not fall within their regulatory ambit. This view
should however not detract from the fact that a well
executed restructuring process ultimately
guarantees fairness and transparency.
This newsletter briefly explained the concept and
procedure for corporate restructuring, while also
highlighting the gains of utilizing the HoldCo model
for corporate restructuring. The model appears to be
a useful and commercially oriented option, the proof
LP
of which is evident in the Nigerian banking industry
as well as in other companies around the world. The
model is therefore recommended for companies
wishing to restructure their operations, especially in
developing countries. Considering its success in the
banking industry, the HoldCo model is not restricted
to any particular sector of the economy.
23
Ibid. See also Tax Issues for UK Holding Companies, available
at http://www.out-law.com/en/topics/tax/international-tax-
/tax-issues-for-uk-holding-companies/. This also applies to
companies in EU countries if the EU Parent/Subsidiary Directive
applies. See Manivest Fact Sheet, cited in Fn24 above.

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This Newsletter was written by Olajumoke
Oyebode and edited by Banji Adenusi, engaged
in the Corporate & Commercial Group, Aina
Blankson, LP.
Corporate & Commercial Group
Aina Blankson LP
5/7 Ademola Street
South-West Ikoyi
Lagos
Tel: +234 1 8980882-3
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E-mail: publications@ainablankson.com
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Disclaimer: This document serves merely as a note and is not intended to provide legal advice to any person or group of persons
whether natural or corporate regarding the issues discussed herein. All persons desirous of legal advice should therefore contact a
lawyer. Aina Blankson LP shall not be liable for any breach or loss resulting from reliance on any part of this Bulletin.

November 2012 - Holding Companies

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