Circumstances change. Business needs evolve. Sometimes you choose a jurisdiction in which to set up an entity only to find that the market isn’t right for your product and you want to try elsewhere. Maybe you incorporated as a C corporation, but you’d actually be better off as a personal services corporation. Perhaps corporate restructuring means that the parent company needs to move for regulatory or tax-efficiency reasons, or a merger means a legal entity rationalization program is in the cards. It could even be that your start-up is raising financing but VC investors will only sign up if the entity is incorporated in business-friendly Delaware.
Whatever the reason, there could be a circumstance in which dissolving or closing down an entity isn’t the right choice for your organization, but you do need to make a change in the organizational structure.
Looking to reincorporate an entity – sometimes known as a statutory conversion, redomiciliation or moving the incorporated jurisdiction for an entity – can help a business to enact a new strategy, become more efficient or meet regulatory requirements across a large group structure. But it’s not as simple as closing the doors in California one day and opening them in Delaware the next. There is a process to properly reincorporate an entity, and if you don’t follow it carefully and with due diligence for entity information, you could find yourself on the wrong side of regulators, facing fines and a reputation hit.
Why would you want to reincorporate an entity?
Let’s take the current situation in Hong Kong as a starting point for discussions. Hong Kong has, for many decades, sold itself as the jurisdiction in which to incorporate as a gateway to Asia – a safe haven with a relatively Western approach to corporate rules and regulations, yet close enough to make it easier to form business connections in growing Eastern markets.
The tiny island jurisdiction is legally separate from its parent, China, under the formal “one country, two systems” constitutional principle set as Hong Kong was handed back to China after 156 years of being a British colony, but recent events have spooked international businesses with entities in Hong Kong. There is a concern that a proposed new extradition law – since revoked – could result in directors and other business leaders being extradited to China’s communist courts to face charges such as leaking state secrets if they publish unofficial Chinese data. The law has seen unprecedented social unrest in Hong Kong, with protests now a regular occurrence.
One stock analyst went on the record as early as June saying he was considering moving his firm to Singapore or the UK, worried that his firm’s critical research makes it “vulnerable to false allegations in China that could be used as a pretext for extradition.” And the head of shared office space operator The Executive Centre (TEC) put plans for a share offering on hold, citing the uncertainty gripping Hong Kong.
This sort of uncertainty in a once-stable jurisdiction can lead to organizations rethinking their strategy. It’s not that Asia has proved an unfruitful market for these businesses, it’s just that the current home for their entity is becoming too risky. In these circumstances, boards may take the decision to reincorporate an entity and move it to a new jurisdiction, sometimes close by – in Hong Kong’s case, Singapore, Malaysia and Indonesia are usually contenders – but also sometimes in a totally new market.
Reincorporating an entity requires robust entity management
It doesn’t have to be an international reincorporation, though; many US companies will reincorporate in a new state to make the most of local regulatory benefits. In most cases, reincorporating an entity within the United States involves a quick and simple statutory mechanism called a “conversion,” which involves the filing of certain forms. For the conversion to occur, both states must accept the move. Remember, though, that each US state is its own jurisdiction with its own corporate laws, and it’s best to seek local advice in both jurisdictions before following through with the conversion. California, for example, is one of a handful of states that does not recognize the concept of conversion.
If a straight conversion can’t be enacted, there are other ways to properly reincorporate an entity – they just take a bit more time and paperwork. The organization in question could form the desired entity type in the right jurisdiction, then merge the existing entity into the new entity; this is much more complex than other ways to reincorporate an entity, and is often the fallback mechanism. There could also be a straight asset transfer, where the newly formed entity purchases the assets of the former entity in order to reincorporate an entity.
Reincorporating an entity doesn’t just happen across US state lines, though. When a company wants to relocate anywhere, they need to go through a process of redomiciliation. Opting to redomicile an entity can sometimes be more beneficial than other methods of setting up in a new country, such as registering a foreign branch or incorporating a subsidiary, but you need to be sure that the new market and its corporate law are right for your business strategy.
Redomiciliation is a process whereby a company transfers its registration from one jurisdiction to another – in effect converting a foreign company into a local company. It can allow for business continuity and can help a company to avail itself of tax benefits and free trade arrangements, but when redomiciliation is done across international borders, it’s best to seek expert advice to ensure the process is completed in a compliant way.
If an organization is going to reincorporate an entity, it needs to ensure that its entity data is totally up to date and that the corporate record is free of errors. The number and types of contracts and vendor accounts an entity has in place can impact the process to reincorporate an entity – for example, if a company has no important contracts or vendor accounts, it has more flexibility in the transaction structure choice – so it’s important to ensure contract management is tight throughout the business lifecycle to maintain flexibility in the process.
Ensure entity data is up to date before starting to reincorporate an entity
Before starting to reincorporate an entity, make sure you’ve got your whole house in order. If the process is begun using an out-of-date corporate record, you can put the whole process at risk – contracts may not be closed correctly, licenses may not be transferred and investors may pull out of financing if the conversion is not clean.
Entity management software, such as that offered by Diligent, enables organizations to centralize their corporate subsidiary data, making entity management and governance simpler throughout the entire organization. With a simplified entity management process, it’s more likely that the compliance and governance teams can keep up with the burden of reporting and data maintenance, which means there will be less work to do to update records before starting to reincorporate an entity.
Likewise, a corporate record that’s kept up to date enables real-time reporting and entity diagramming, which helps guide the board in making the ultimate decision to reincorporate an entity.
Diligent Entities helps organizations to surface the right information to the right people at the right time in order to complete both routine and extraordinary business processes, such as reincorporating an entity. It also seamlessly integrates with the Diligent Boards portal and a secure file-sharing platform to create the Governance Cloud, an all-in-one governance ecosystem that fully meets the needs of today’s board directors.
Get in touch and request a demo to see how Diligent Entities can help your organization in its quest to properly reincorporate an entity, and continue your drive for growth.