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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 precursor 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 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 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 that 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.