There are a multitude of reasons to restructure. Demergers are common restructuring transactions, implemented where there is a desire to separate assets, businesses or companies from within a company or group structure. We are increasingly seeing demergers being effected using a reduction of capital process. These structures are often used in advance of an M&A transaction and are commonly the most tax-efficient method of achieving a demerger, but how do they work in practice? In this article we consider the various legal steps required.
1. Incorporation of a New Parent Company:
A new holding company (New Parent) is incorporated and placed above a trading company or the existing parent company in the group structure. This is done through a share-for-share exchange, where the New Parent acquires shares in the existing entity in exchange for new shares in New Parent. Shareholders effectively exchange their shares in the existing entity for new shares in New Parent.
2. Share Capital Reorganisation:
The New Parent may need to reorganise its share capital into different classes to reflect the rights and values of the retained and demerged businesses/entities. This step is crucial for ensuring that the capital reduction reflects the underlying value of the demerged assets.
3. Intra-Group Transfers:
Depending upon the structure of the group, and the business or assets being demerged and retained, intermediate steps will be taken to ensure that the demerged business/assets or entities are held within separate companies, usually owned directly by the new parent. These intra-group transfers may take the form of hive-downs, hive-ups, distributions in specie or other corporate transactions. These may include the incorporation of one or more new companies. Particular attention needs to be paid to ensuring that any transfers are implemented for appropriate consideration and that sufficient distributable reserves are available for any distributions in specie. These transfers will result in the New Parent holding at least two subsidiaries, one of which will own the non-core assets or business.
4. Incorporation of Newco:
A new company (Newco) is incorporated to receive the non-core subsidiary. This Newco should have initial nominal shareholdings proportionally reflecting the shareholders in New Parent.
5. Reduction of Capital Demerger:
New Parent effects a reduction of capital using the requisite procedure under the Companies Act 2006. This includes the directors of New Parent filing the solvency statement, members' resolution and statement of capital. These documents are filed at Companies House. The reduction in capital results in share capital being reduced by the cancellation of certain shares reflecting the underlying ownership in the non-core subsidiary. The shares in the non-core subsidiary are transferred to Newco and Newco allots shares to those shareholders who held the cancelled shares.
Throughout this process, it is important to seek tax and legal advice to ensure compliance with relevant laws and to avoid adverse tax consequences.
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