Breaking up is hard to do ... but not with expert advice from our Corporate team.
We are advising on an increasing number of transactions where corporate groups need to be split up. There can be various reasons to split up a company, or a group of companies, including where relationships between the shareholders have broken down; to allow for diversification; as a pre-cursor to a sale or simply as a result of estate planning. These transactions inevitably take time and careful planning is required; so if you are considering going down this road, it is important to involve the professionals at as early a stage as possible.
A demerger doesn’t have to be a bad thing or as a result of animosity between the parties involved. We often find that these transactions are carried out simply because it makes good sense for the business to take a different structure. Just because a company has always existed in a certain way does not necessarily mean that it’s the only and most appropriate set-up. So it is always important to consider if putting some effort into splitting the business now, could save time and money in the long run.
There are numerous ways of achieving a separation and the most suitable method will depend upon a number of factors - in particular who is to own what in the end, and what the shareholders’ intentions are. Before embarking on any demerger we will need to discuss with you what your long-term plans are; what the company (or companies) currently owns (and what the objectives are in respect of such assets); and who is to be involved in each part of the business going forwards. Getting this wrong can result in a hefty tax bill later down the line and so it is important that we have access to the relevant information and the shareholders have a clear goal in mind. Working with your accountants, we would then recommend a plan that puts in place the required structure (so far as possible) in the most cost- and tax-effective manner.
There are four main ways of demerging a company.
- Direct dividend demerger: where the company will declare a dividend in specie (i.e. of assets rather than cash) of certain assets and those assets are transferred directly to the shareholders (or a certain class of shareholders). This is the simplest demerger structure but relies on the company having sufficient distributable profits and, depending upon the assets to be demerged, may not necessarily be the most tax-efficient.
- Indirect dividend demerger: where a company will declare a dividend in specie of certain assets and those assets are transferred to a company owned by the shareholders (or a certain class of shareholders). Again, this is a relatively simple process but relies on the company having sufficient distributable profits. We would expect a full demerger agreement transferring the relevant business to be entered into and so it would be important to establish what the company has and what is to move.
- Capital reduction demerger: where a company reduces its share capital and simultaneously transfers assets (normally shares in a subsidiary) to a company owned by the shareholders (or a certain class of shareholders). This has an advantage in that it does not require the company to have distributable profits but it will be important to make sure that carrying out the demerger does not impact on the company’s ability to pay its creditors. This route involves several technical steps but is becoming more and more common.
- Section 110 liquidation demerger: where the company is voluntarily liquidated by members and transfers assets to two or more companies owned by the shareholders (or a certain class of shareholders). This route needs a liquidator to be involved and appointed, but our team has appropriate experience and would be on hand to assist. There is the disadvantage of reputational damage associated with liquidating a group company and this should be weighed up before going down this route.
All four demerger methods have their advantages and disadvantages and have proven to be very effective in creating two separate groups owned by different shareholders (in order to create a partition) and also to create two separate groups owned by the same shareholders perhaps before a sale.
In almost all cases, preliminary steps need to be undertaken. These generally involve setting up new companies and moving assets and shares around but, with careful planning, tax liabilities can be minimised and the new structure can be put in place relatively painlessly. One important factor to consider when deciding which demerger path to go down is to establish what can and cannot move and what administratively may be involved. For example, if you are trying to split investment activities from the trading business, you may prefer to move the investments rather than having to agree for contracts to be assigned and the staff to transfer. These are some of the practical issues that we can assist you with and which will feed into the demerger planning.
Recent transactions carried out by our Corporate team have included:-
- the capital reduction demerger of a trading company which also held various investment properties. The shareholders had received an offer for them to sell the trading business but they wished to retain their investment properties from which they received a healthy income. It was initially proposed that the trading business be sold by the company by way of an asset sale but this would have resulted in significant cash being left in the company which the shareholders would need to pay dividend tax on in order to extract it (likely to be between 30 and 40%). Working with the company’s accountants, the team implemented a scheme where the trading business (including retained cash) was able to be transferred into a separate company which could then be sold leaving the shareholders with a company holding their investment properties. Being able to sell the trading company by a share purchase rather than selling the assets out of the company meant that the shareholders were able to benefit from entrepreneurs relief, reducing their tax liability to 10% - a considerable saving for not much inconvenience;
- the capital reduction demerger of a trading company to partition the business between two arms of the family who wished to go in different directions. By becoming involved in the early stages, the team was able to put in place a plan which meant that the company’s tax liability for carrying out the demerger would be in the region of £700 rather than in the region of £70,000, as initially envisaged by the shareholders. The outcome was that each side of the family held the assets that they wanted to end up with and were able to trade freely without recourse to the other;
- the indirect dividend demerger of a company which had been passed down through generations and was held by four cousins who wished to take the business forward in different ways. Again, a plan was implemented which resulted in each shareholder holding their own company from which they could trade;
- the section 110 liquidation demerger of a company holding significant investment assets, together with a trading business. In this case, as part of estate planning for the shareholders, the clients wished to separate the investment assets from the trading business to ensure that business property relief would be available on the death of a shareholder in respect of the shares held in the trading business. By carrying out the demerger, the companies have been able to isolate risk by having the investments separate from the trading business and have also improved the inheritance tax position for the shareholders ensuring that relief will be available in respect of around £3,000,000 worth of assets;
- the direct dividend demerger involving the split of two companies to enable family members to take the businesses in different directions. The effect will be that each individual company will be able to trade independently with only a small amount of stamp duty being paid.