Statutory demerger: Two shareholders go their separate ways
- John Deane
- Updated: Mon, 21st Nov 2016
We advised two shareholder on the statutory demerger of their private limited company. The two shareholders each wanted to create separate companies, which did not share a common strategy. Following the demerger, each shareholder could focus more directly on their respective businesses via their own separate legal entities.
Background to statutory demerger
Shareholder A wished to keep the existing registered company and premises. Shareholder B wished to set up in a new premises. To facilitate this, a new company was incorporated by Shareholder B to acquire certain demerged business and assets. Various assets of the original company were transferred to this new company by way of a dividend in specie. Aa dividend in specie is a dividend that is satisfied in assets other than cash. In this case the assets mainly consisted stock in trade.
Provided certain conditions are met direct dividend demergers are treated as “exempt distributions” by the HMRC. We obtained advance clearance for an “exempt distribution” and therefore the distribution was exempt from ACT and income tax liability for shareholders.
Mechanics of statutory demerger
We protected Shareholder A following the distribution of the dividend in specie, by varying the rights of shares in the original company. Following the dividend in specie, a transfer of half the stock, we automatically re-designated Shareholder B’s shares. Shareholder B then had no right to vote or received dividends or other distributions.
When the demerger completed, the original company’s shares were transferred to Shareholder A for nil consideration. HM Revenue and Customs approved the transaction, which preserved capital gains tax treatment.
Statement of solvency
The original company wished to reduce its share capital. This required a statement of solvency signed by all directors, which we drafted and explained to the directors. The members provided a special resolution to reduce capital.
We obtained HM Revenue and Customs clearance that this was a commercial transaction not being carried out for tax avoidance. Without this clearance there could have been income tax and corporation tax liabilities.
The directors had unequal but substantial overdrawn loan accounts. We advised how and why the loan accounts should be balanced off before the demerger completed.