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De-mergers and re-organisations are used to split up a business or consolidate subsidiaries for a variety of reasons. There are tax reliefs designed to make the transactions tax natural for shareholders. But, there is a but being the structure needs to fit within the tax rules. There will be unexpected tax liabilities if not handled properly.
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The key concerns we look out for when demerging a business are:
There are three key ways to split a business. The best choice will depend on your circumstances and business objectives. You should consider:
This usually involves a creation of one or two new companies (NewCo) underneath the existing parent company. The NewCo shares are then transferred to the individual shareholders in proportion to the value of the respective businesses. Alternatively, new companies independent and distinct are created from a business.
We find statutory demergers are a popular choice. A statutory demerger offers a well established route to achieve many of the desired outcomes. It is possible to create the demerged businesses free of any immediate tax liability. A big benefit is that HMRC will give advance clearance on the tax neutrality.
Splitting the business can be carried out by reducing the share capital of the existing company. The existing business is transferred to the shareholders or new companies held by the shareholders and the consideration for the transfer is treated as a repayment of share capital. If carried out as a scheme of arrangement, it can be very tax efficient.
A company can reduce its share capital and realise cash by reducing the:
Capital reduction generates a reserve which can be either paid out to shareholders e.g. a departing shareholder or retained as a reserve for the company. It cannot be used to pay a shareholder a cash payment which exceeds the amount of the share capital reduction.
Reduction of capital requires shareholder approval and a solvency statement. Reduction of share capital is a popular route for splitting a business.
A liquidation demerger involves dividing an existing business into separate businesses between existing shareholders and closing down or liquidating the existing company. It is commonly used where the shareholders want to continue running the business but do not share the same vision for the future.
The downside is that the trading history and goodwill of the demerged company is destroyed. Liquidation is not always straight forward if there are potential liabilities to face. There are also the costs of a liquidator to consider along with whether the company can be legally liquidated.
HMRC have tightened up on the tax benefits available to shareholders upon liquidation. Consequently, we are finding that this route is not as popular as in the past but it still works in some cases.
Splitting a business may result in a change of employers especially if a NewCo is created. Splitting a business may affect the employment terms. The most common scenario is that the transfer of employees falls under the TUPE legislation.
Amongst other things TUPE means that:
We can look at the employment law issues and plot a way forward which is commercially workable as far as is possible under the TUPE framework of law. Timing can be important and it pays to plan for the whole TUPE process.
It is often the case that some employees are no longer needed as a result of the de-merger. Dismissal as a result of a de-merger can be a fair reason meaning the employer is not exposed to an employment law claim. The process is delicate and consultations and communication with the employees is needed. We do take employers through this difficult process and see them through to the other end.
Splitting a business will have an impact on any existing options or employee share arrangements. The impact will depend on the exact terms of the option agreement or shares held and the articles of association or any shareholders’ agreement.
We find the most likely consequences of a demerger on shares held by employees are:
There is no standard advice – each case needs to be looked at independently.
Often before a demerger can happen the company must change its articles of association and get shareholder consents to effect the demerger. We look at what needs doing for you.
We review and/or draft the demerger documentation and
Demergers can be very tax efficient, if carefully structured. Often, tax can be reduced to nil. If a demerger is not carefully structured the shareholders risk:
A carefully structured demerger will follow the HMRC approved scheme of reconstruction rules. The rules are complex but for most demergers the following basic criteria have to be met:
A technically demanding area of tax and company law requiring good project management which the team demonstrates.
We needed to divide our business in half and change the shareholders to match – Gannons achieved our goal.