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Simple English definitions for legal terms
Reorganization
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A quick definition of Reorganization:
Reorganization is when a company changes the way it does things because it's having money problems, wants to do things differently, or is ordered to by the government. This can mean changing who owns the company, getting rid of some parts of the company, or firing employees. There are seven different types of reorganizations defined by the Internal Revenue Code. For example, Dell borrowed money to buy back its stock and become a private company, and AT&T split into smaller companies because of government rules. Reorganization can also happen when a company goes bankrupt and needs to restructure its debts and operations.
A more thorough explanation:
Reorganization refers to the process of making changes to a company's structure or finances due to financial difficulties, a desire to change strategy, or a government order. This can involve various tactics such as changing assets and liabilities, ownership structure, consolidating or eliminating departments or product lines, replacing or discharging employees, or renegotiating debt agreements.
There are seven types of reorganizations defined by the Internal Revenue Code § 368:
- Statutory merger or consolidation
- Acquisition of one company's stock by another corporation, with the acquired company becoming a subsidiary by the acquiring corporation
- Acquisition where the acquired corporation must liquidate, with shareholders of the acquired corporation becoming shareholders in the acquiring corporation
- Spinoffs or split-offs
- Recapitalization
- Change in identity, form, or place of organization
- Chapter 11 asset transfer
For example, in 2013, Dell borrowed bank loans to purchase public stock to take the company private and give the founder, Michael Dell, more control over the company's growth. This is an example of recapitalization. Another example is when Bell Telephone, now AT&T, faced antitrust regulation in the 1970s-80s and restructured by spinning off their monopoly into seven regional telephone communication providers.
Reorganization can also refer to the process of filing for Chapter 11 bankruptcy, which allows a company to restructure its debts and operations to become financially stable again. The Small Business Reorganization Act is a recent addition to Chapter 11 bankruptcy that provides a streamlined process for small businesses to reorganize and emerge from bankruptcy.
Overall, reorganization is a way for companies to adapt to changing circumstances and improve their financial health.