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. Our Corporate Commercial team have substantial experience in advising on and carrying out demergers.
Reasons to carry out a demerger
Companies and groups demerge for various reasons but an increase in shareholder value will usually be the intended aim. Reasons to demerge include:
- Dividing a company or group between shareholders in dispute;
- 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 due to another business;
- Inability to sell a business (which can be demerged instead); and
- Dividing a jointly owned group.
Types of Demerger
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.
We can provide assistance in choosing the correct structure of the demerger. The main ways of structuring a demerger are set out below:
The parent company declares a dividend in specie (i.e. a distribution of assets rather than cash) of the shares of the subsidiary to be demerged, as a result of which ownership transfers from the parent company to its shareholders. This is not usually used to demerge a business as it constitutes an income distribution attracting income tax treatment.
Indirect or three-cornered dividend
The parent company declares a dividend in specie of the shares of the subsidiary (or of the assets of a business) to be demerged to a newco (or existing third-party company) and the newco/third party subsequently issues shares to the parent company’s shareholders. If structured correctly a three-cornered dividend can qualify as a scheme of reconstruction, which may offer substantial tax relief advantages over a direct dividend structure.
Indirect or three-cornered reduction of capital
The parent company carries out a reduction of share capital which is satisfied by the transfer of the business to be demerged to either the parent’s shareholders or a newco which then issues shares to the parent’s shareholders. This can be used where a company does not have sufficient distributable profits to declare a dividend in specie or does not want to reduce its distributable reserves.
Scheme of arrangement
A court approved procedure under Part 26 of the Companies Act 2006 which is carried out with shareholder consent and (frequently) creditor approval to make a compromise or arrangement with the members or creditors of the parent company. This is often used in combination with the direct dividend, three cornered dividend, three-cornered reduction of capital and/or a liquidation scheme.
The parent company is liquidated under section 110 of the Insolvency Act 1986 and its assets are transferred to two (or more) newcos. The liquidator accepts the shares in the newcos as consideration for the transfer of the assets to the newcos and then distributes the shares to the parent’s shareholders pursuant to the parent’s winding-up.