How demergers can assist with pre-sale simplification, shareholder disputes and succession issues

by | 29 October 2023

It is not uncommon to find companies with a variety of activities being undertaken, or where excess cash has been ploughed into investment opportunities such as property.

Towards the end of a company’s life if liquidation is intended, trades can be wound up or sold and investment assets sold or distributed as part of a members’ voluntary liquidation. Conversely if a share sale is the preferred option or separation of shareholder interests as viable independent businesses is desired, possibly for the next generation, then demergers can be an effective tool.

Demergers are also useful where association based requirements do not permit a sizeable secondary activity, divorce proceedings, incoming investor requirements, shareholder disagreements, risk management concerns and a myriad of other commercial reasons.

There is a whole chapter within the Corporation Tax Act 2010 dedicated to statutory demergers, however these may not be helpful if a sale is anticipated within the following five years or where investment activities are set to be partitioned. Non-statutory demergers rely upon an assortment of tax provisions in order to achieve separation, this is an indirect way of highlighting that demergers can be complex and heavy in terms of professional fees. That said, they can provide a tax-free division and limit the administrative burden of transferring activities and assets between companies.

Some recommended steps:

  • Ensure your management accounts are up-to-date.
  • Identify assets not included at market value and those which are not included on the balance sheet e.g. goodwill.
  • Have an outline agreement of how the business and shareholder split would look after the division, identifying any shareholder value disparity. Noting that in some instances the shareholder groups will remain the same as before, the transaction merely facilitating onward estate and succession planning.
  • Engage tax and valuation experts to outline the available options, associated tax and commercial impact of each.
  • Engage solicitors to draft contracts, revised shareholder agreements and statutory register entries. It may be that a shareholder base retaining the original company (and related history of liabilities) may require some form of warranties from an exiting group of shareholders. Anti-embarrassment clauses may also be discussed.
  • Consider any post-demerger commercial reporting requirements.
  • Create post-demerger business plans for each independent business and implement them knowing each is now unimpeded by the other.

Given this is a sizeable transaction, it really is worth taking the time to consider the much longer-term plan and objectives, ensuring that this is the right time to proceed with dividing the multiple business activities within your company. If we can assist in any way, please do get in touch.

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