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What is a demerger, and why would a company demerge?
A demerger is a separation of different business activities carried on by a company or group into separate companies or groups, which are then (usually) owned by the same shareholders.
Companies and groups demerge for various reasons, including:
- Dividing a company or group between shareholders in dispute or who have agreed to go their separate ways;
- Separating successful businesses from struggling businesses;
- Releasing the full value of underlying businesses;
- Separating businesses between different business sectors;
- Freeing one business from the regulatory or financial requirements imposed by another business;
- Inability to sell a business (which can be demerged instead);
- Dividing a jointly owned group;
- Separating business assets in order to either ringfence or make them attractive to a potential buyer, i.e. separating substantial property assets from a trading business; and
- Extracting a subsidiary business from a group so that individual shareholders can benefit from tax reliefs (such as Business Asset Taper Relief)
There are several methods of effecting a demerger, each one having its own advantages and disadvantages.
The method chosen will usually be influenced by tax considerations and by the availability of distributable profits in the company.
It is critical that tax advice is obtained before considering a demerger to ensure that tax liabilities are not triggered and to obtain any available tax clearance.
What are the potential pitfalls of a demerger?
Whilst demergers can be a strategic manoeuvre for companies looking to streamline operations, unlock value, or focus on core business activities, beneath the surface of this seemingly straightforward process lie a myriad of legal complexities and potential pitfalls that companies should keep in mind when contemplating a demerger.
Below, we have listed a few of these, but this is not an exhaustive list.
1. Stamp Duty Land Tax (SDLT)
When dealing with property assets, companies must consider tax and, specifically, when the property is involved, SDLT. One common pitfall can be transferring property out of the original company to save on stamp duty costs.
However, if a property is left in the original company and instead, there is a transfer of shares in the trading entity, a significant tax saving can be achieved.
Transferring shares attracts 0.5% stamp duty, whereas SDLT on property transfers can skyrocket to 5% or more.
Careful tax planning here is crucial to save substantial costs.
2. Stamp Duty Timing Tangle
Timing is everything in demergers, particularly concerning stamp duty obligations.
Delays can arise if stamp duty is payable or adjudicated exempt before proceeding to the next step where such levy is imposed.
Expediting the stamp duty process can shorten timelines, but if relying on stamp duty exemptions, you should anticipate longer adjudication periods—up to 6 to 8 weeks.
3. Banking and Security Negotiations
Engaging with lenders may be necessary as part of a demerger process.
Early discussions with lenders can help pre-empt any unnecessary delays and hurdles and it is crucial to ensure that such engagement is ongoing throughout any step plan to ensure any banking documents to separate assets and determining any necessary security arrangements for the new entities is dealt with in sufficient time.
4. Formalities
The sheer volume of documents and formalities involved in a demerger necessitates planning.
Ensuring the availability of shareholders, directors and lenders, is crucial. Leveraging online signatures and powers of attorney can streamline the execution process, but careful coordination remains essential.
Whilst detangling businesses can potentially disrupt operational synergies when it comes to a demerger, clear communication and professional advice will help mitigate any disruption for stakeholders.