Demergers – Keeping it simple

Tuesday 16 October 2018

Successful businesses are often built from the ground up, and companies often incorporate multiple subsidiaries or acquire other complimentary businesses to form part of their group, each carrying out their own duties alongside the core concept that started it all.

Frequently, successful businesses expand into different areas and carry out completely different sets of activities.  Whilst this may be a sensible business model, spreading the risk, it may lead to a complex business structure, which may not be tax efficient.

Fortunately, a company can simplify its group structure by demerging it; separating the business into two or more parts.  A demerger allows a group to transfer a company, or sub-group of companies, out of the wider group, so that it can be run under separate management, which may or may not involve the same shareholder(s) as the original group.

Types of Demerger
There are four main types of demerger:

• Statutory Demergers (also known as dividend demergers): this type of demerger involves a parent company declaring a dividend in specie (a distribution to shareholders in a form other than cash, in this case, shares of the target (demerged) subsidiary) to its shareholders or to another separate newly incorporated company;
• Capital Reduction Demergers: this type of demerger is used when sufficient distributable reserves are not available so a dividend in specie cannot be declared. Instead the holding company will reduce its capital, in consideration for which the target (demerged) subsidiary is transferred to a newly incorporated holding company, which in turn issues shares to the original holding company’s shareholder(s);
• Scheme Demergers: here a newly incorporated holding company is inserted and the shares in the target (demerged) subsidiary are transferred to it that new company by way of a scheme of arrangement, a court approved agreement between a company and its shareholder(s) or creditor(s); and
• Liquidation Demergers: here the business and assets of the parent company are distributed by the liquidator directly to the two newly incorporated companies; each of these new companies will then hold a distinct part of the demerged business and issue shares to the original shareholder(s).

 Why carry out a Demerger?
From a commercial perspective, the simplification of the group structure of a business often:

• provides a focus or direction for each part of the business;
• separates the different risk and/or commercial profiles of the various strands of the business;
• provides a way to introduce new shareholders, investors and/or option holders to one part of business; and/or
• facilitates the sale of a specific part of the business.

From a tax perspective, a demerger may aid a trading business and its shareholder(s) in qualifying for:

• entrepreneurs’ relief;
• the substantial shareholding exemption; and/or
• inheritance tax business property relief.

Whatever the reason for a demerger it is important that you get expert legal advice from the outset.