We are advising on an increasing number of transactions involving the dissolution of corporate groups. Splitting up a company, or a group of companies, can occur for a variety of reasons, such as when relationships between shareholders have deteriorated; to allow for diversification; as a prelude to a sale; or simply as a result of estate planning. These transactions invariably take time and require careful planning; therefore, if you are considering going down this path, it is critical to involve professionals as early as possible.
A demerger does not have to be a negative event or the result of animosity between the parties involved. We frequently discover that these transactions are carried out simply because it makes good business sense for the company to adopt a different structure. Just because a company has always operated in a certain manner does not imply that it is the only and most appropriate setup. As a result, it is always important to consider whether putting in some effort now to split the business will save time and money in the long run.
There are numerous methods for achieving a separation, and the best method will depend on a number of factors, including who will ultimately own what and what the shareholders' intentions are. Before proceeding with any demerger, we will need to discuss with you your long-term plans; what the company (or companies) currently owns (and what the objectives are for such assets); and who will be involved in each part of the business going forward.
Making a mistake here could result in a hefty tax bill later on, so it is critical 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 implements the necessary structure (to the greatest extent possible) in the most cost- and tax-effective manner.
A COMPANY CAN BE DEMERGED IN FOUR WAYS
Direct Dividend Demerger: When a corporation declares a dividend in specie (i.e., of assets rather than cash) on specific assets, those assets are transferred directly to the shareholders (or a certain class of shareholders). This is the most basic demerger structure, however it is dependent on the business having adequate distributable earnings and, depending on the assets to be demerged, may not be the most tax-efficient.
Indirect Dividend Demerger: A firm declares a dividend in the form of specific assets, which are then transferred to a company owned by the shareholders (or a certain class of shareholders). Again, this is a pretty straightforward process that is dependent on the firm having enough distributable earnings. We would expect a comprehensive demerger agreement transferring the relevant business to be entered into, therefore it is critical to determine what the firm has and what is to be moved.
Capital Reduction Demerger: A transaction in which a business decreases its share capital while simultaneously transferring assets (often shares in a subsidiary) to a company owned by the shareholders (or a certain class of shareholders). This offers the advantage of not requiring the business to have distributable earnings, but it is critical to ensure that the demerger does not impair the company's capacity to pay its creditors. This approach entails numerous technical stages, but it is becoming increasingly popular.
Section 110 Liquidation Demerger: when a business is voluntarily dissolved by its members and assets are transferred to two or more companies controlled by the shareholders (or a certain class of shareholders). This approach necessitates the involvement and appointment of a liquidator; however, our staff has relevant knowledge and would be happy to assist. The drawback of reputational harm connected with dissolving a group business should be considered before proceeding.
Bankruptcy and Insolvency Adjudicator: The Code recommends two distinct tribunals to supervise the insolvency resolution process for individuals and businesses: The National Company Law Tribunal hears cases involving corporations and limited liability partnerships, whereas the Debt Recovery Tribunal hears cases involving people and partnerships.