In recent years, companies have come under increasing pressure to present a clear strategy and direction, with shareholders questioning the strategic rationale of corporate businesses that are perceived to be too diversified.
Abigail Owen, Corporate Partner at DMH Stallard LLP, has recently seen an increase in the number of clients divesting parts of their business and tidying up their corporate structure; here she considers some of the benefits of re-organising your business or selling off non-performing divisions or companies.
What is a demerger?
Essentially it is restructuring the business by divesting non-core business lines. For example, a manufacturing business which also has retail outlets, may decide to put the retail outlets in a separate company. There is no prescribed statutory procedure, but there are legal and tax processes to be considered and followed when demerging a business.
What are the benefits of demerger?
The key benefits of demergers for companies include the ability for a standalone non-core business to unlock the value of its business and allow its management to focus exclusively on the non-core business. They offer companies a chance to provide existing shareholders with a continuing stake in the business which might otherwise have been divested. Demerging a non-core business line can also lead to greater flexibility and improved shareholder alignment.
After a business has been split out, the standalone non-core businesses have the potential to:
- unlock the value of the underlying non-core business in a different way to divestment to a third party;
- allow management to focus exclusively on the non-core business;
- allocate their own capital and explore their own opportunities;
- better comply with their own regulatory obligations; and
- put both the core business and the non-core business into a position to be separately (i) sold and/or (ii) invested in by third parties.
What influences the structure of a demerger?
The choice of demerger structure is usually driven by two key factors:
A. the tax treatment for shareholders; and
B. the availability to the company of sufficient distributable profits.
Key structuring considerations:
A key consideration for demergers is operational separation: do the different businesses have shared facilities, staff, pension arrangements, premises, contracts, banking resources? These would need to be identified and a plan put in place to split out those interests to enable each business to operate independently of each other.
If you have any questions on demerging your business or business law matters, please contact Abigail Owen on 01293-558573 or firstname.lastname@example.org.