Direct dividend demerger: where the company will declare a dividend in specie i. This is the simplest demerger structure but relies on the company having sufficient distributable profits and, depending upon the assets to be demerged, may not necessarily be the most tax-efficient. Indirect dividend demerger: where a company will declare a dividend in specie of certain assets and those assets are transferred to a company owned by the shareholders or a certain class of shareholders.
Again, this is a relatively simple process but relies on the company having sufficient distributable profits. We would expect a full demerger agreement transferring the relevant business to be entered into and so it would be important to establish what the company has and what is to move. Capital reduction demerger: where a company reduces its share capital and simultaneously transfers assets normally shares in a subsidiary to a company owned by the shareholders or a certain class of shareholders.
This route involves several technical steps but is becoming more and more common. Section liquidation demerger: where the company is voluntarily liquidated by members and transfers assets to two or more companies owned by the shareholders or a certain class of shareholders. How will you handle any transfers or licenses to the new entity? Will you be charging a fee to the new company for their use?
As for goodwill, what will happen to this when the company splits, and how will this feature in the balance sheet? Have you consulted with your existing suppliers and read the terms of your major contracts?
Will your suppliers be prepared to trade with the new entity and do you need to seek their consent to a split? May terms such as pricing change? How about your customers? Do you anticipate any challenges when your spun-off entity starts trading on its own account? Will your bank need to consent to a demerger? Might the rate of interest they charge you change as a result of the split?
Where will your new business trade? Will you need to revisit any property leases or create new arrangements so that the spun-off entities have appropriate premises. Do you have distributable reserves in the business? This factor may be important when it comes to how you structure your demerger. Drawing up pro-forma balance sheets for each new entity and the retained business is a good way to examine how each will function in the future, particularly in terms of ensuring adequate cashflow.
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