Statutory demerger: shareholders go their separate ways
Gannons advised two shareholders 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 new premises. To facilitate this, Shareholder B incorporated a new company 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. A dividend in specie is a dividend that is satisfied in assets other than cash. In this case the assets mainly consisted of stock in trade.
Provided they meet certain conditions then HMRC treats direct dividend demergers as “exempt distributions”. This means they are exempt from Advance Corporation Tax (ACT) and income tax liability for shareholders. We obtained advance clearance for an “exempt distribution” from HMRC.
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 two shareholders transferred all of the original company’s shares to Shareholder A for nil consideration. HMRC 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 clearance from HMRC, satisfying them as to the commercial nature of this transaction, not 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. Finally, we advised how and why the directors should balance off the loan accounts before the demerger completed.