Correct understanding of corporate restructuring and internal restructuring

In the process of operation, many businesses in Vietnam have to carry out reorganization measures to adapt to the market, overcome crises or improve management efficiency. Two concepts that are commonly used in these situations are "internal restructuring" and "corporate restructuring." However, in practice, there are many cases where these two terms are used interchangeably, leading to confusion in strategic planning, legal implementation and resource allocation. This article aims to provide a clear and systematic analysis so that businesses, investors and legal practitioners can properly understand and effectively apply the above two concepts.

1. Concept and understanding

Corporate restructuring - A comprehensive reform process

Corporate restructuring refers to the implementation of strategic changes at the organizational, legal, financial, or business model level with the goal of improving competitiveness, handling crises, or preparing for long-term development. This process often involves legal procedures such as changing the type of business; Merger, consolidation, division and transfer of all assets; Handling insolvency through dissolution or bankruptcy; Adjust the ownership structure and operating model.

Restructuring is a complex operation, requiring coordination between many departments such as legal, financial, audit and governance, and strictly complying with legal regulations, especially the Law on Enterprises 2020, the Competition Law 2018, the Bankruptcy Law 2014, the Law on Investment and other specialized regulations such as labor laws, tax, accounting, etc.

Internal restructuring - Internal adjustments to improve efficiency

Internal reengineering focuses on adjusting internal factors of the enterprise such as:

• Financial restructuring (reducing borrowing costs, debt restructuring);
• Human resource management (streamlining the apparatus, changing the personnel model);
• Production – business process;
• Internal management and operation model.

Unlike corporate restructuring, internal restructuring activities do not change the legal entity of the enterprise and usually do not incur complicated legal procedures. Internal restructuring aims to improve operational efficiency in the short or medium term without changing the overall strategy or legal nature. For example, many businesses in the retail industry have had to restructure their personnel after the COVID-19 pandemic to adapt to the trend of e-commerce and online shopping.

2. What is the difference between internal restructuring and corporate restructuring?

For a comprehensive and holistic view of the typical differences between these two activities, we interpret and illustrate them with the table below.

Prime Minister Pham Minh Chinh chairs working session with Committee for Management of State Capital at Enterprises and 19 state-owned corporations/groups. Source: Government News

3. Choice of business

Usually, in the business process, enterprises choose to restructure when one or more problems occur such as:

1. Enterprises that want to change their business model to suit new business trends or businesses that want to expand into new markets;
2. It is necessary to change legal entities to serve capital mobilization such as switching to a joint stock company for IPO, or transferring from an IPO enterprise to an ordinary enterprise;
3. Having to deal with systemic and vital crises of enterprises such as bad debts that can lead to insolvency or may fall into a pre-bankruptcy state;
4. Have a strategic merger or divestment plan, or execute a merger and acquisition transaction with another entity.

The practice of business activities in the Vietnamese market shows that more and more businesses are forced to restructure their organizations to help businesses escape dangers and gradually find a "breath of life" to "regenerate businesses. The case of Nova Real Estate Group Joint Stock Company (Novaland) falling into a debt crisis and forced to undergo a comprehensive restructuring is a "case study" that Vietnamese businesses consider as an example to reflect on themselves and find effective contingency plans in risky and uncertain business activities. At the end of 2022, when the bond market froze after scandals related to the rampant bond issuance of Van Thinh Phat, Novaland with the position of one of the largest domestic and international bond outstanding units on the Vietnamese stock market at this time,  the pressure to repay maturing bonds is too great and the ability to issue more bonds is stalled because investors' confidence in this activity is no longer there. Along with that, Novaland's projects encountered legal troubles, leading to Novaland falling into a serious crisis unprecedented in its history. In the face of market fluctuations and the State Bank's tightening monetary policy, Novaland's Board of Directors and Board of Directors drastically came up with strong solutions. Specifically, such as reducing unnecessary industries, cutting personnel, adjusting strategies; at the same time, it is to invite experts and the world's leading consulting units to help the Group restructure to ensure the stability of production and business activities. After a long period of comprehensive restructuring, up to now, Novaland's financial and business situation has gradually stabilized and made remarkable improvements[1]. 

On the contrary, for internal restructuring activities, it can be seen that this is a fairly frequent activity and is applied by many businesses to improve and innovate their business activities. According to our findings, businesses often restructure their businesses when:

1. It is necessary to streamline to reduce costs and increase competitiveness;
2. Experiencing temporary difficulties in finance or cash flow, but these difficulties are usually small and do not affect the existence of the business too much;
3. Businesses wish to improve their management capacity or adapt to changes in the business environment such as digital transformation, supply chain transformation, or applying new technology to business activities.

A current internal restructuring activity that is carried out by many businesses is the restructuring of labor resources affected by artificial intelligence (AI) technology and the trend of online shopping and transaction of consumers taking place very quickly after the covid 19 pandemic.  especially in the financial and banking sectors.  Many banks and securities companies have used chatbots (AI-based virtual assistants) instead of call center personnel, personnel answering customer questions on social networking platforms. With these new trends, commercial banks are comprehensively internal restructuring the system of branches and transaction offices nationwide and laying off the number of employees because customers are used to and prioritize online transactions instead of going to transaction offices[2]. This,  forcing many credit institutions to cut operating costs, restructure systems and personnel to enhance efficiency in business activities. This process is happening more and more frequently.

However, in many practical cases in Vietnam, corporate restructuring and internal restructuring activities can intertwine or transform each other. Typically, in the case of an enterprise that performs financial restructuring to reduce loan interest rates, extend debts but then is forced to merge with partners to survive and carry out corporate restructuring activities afterwards. Or conversely, if the enterprise plans to split the company but in fact only adjusts the internal apparatus without legal changes, this activity is only considered as internal restructuring the operation of the enterprise and not corporate restructuring.

4. A few recommendations for businesses

Before carrying out corporate restructuring or internal restructuring activities of their enterprises, enterprises should comprehensively assess the financial, market and legal situation before choosing one of these two options appropriately. In addition, it is very necessary to consult legal experts right from the planning stage to minimize legal risks and disputes arising. Because the opinions and advice of people with legal expertise will help businesses choose the right type of structure as well as limit the risks that are easy to arise in the processes of restructuring and improving this business. Finally, businesses should establish a roadmap for these activities in detail, which clearly defines short-term, medium-term and long-term goals in accordance with the choice of restructuring or restructuring so that they can be implemented smoothly in practice.

With Vietnam's economic context changing rapidly, thorough preparation and a proper understanding of business restructuring tools are vital factors for businesses to adapt and break through. Understanding and clearly distinguishing between "corporate restructuring" and "internal restructuring" is the foundation for businesses to accurately determine goals, strategies and implementation methods in accordance with the actual situation. A restructuring strategy at the wrong time can cost businesses resources and get involved in unnecessarily complex legal issues, as well as potentially miss opportunities for quick and effective internal restructuring.