Demergers – breaking up can be (relatively) easy
During times of business upheaval and disruption it is useful to revisit initiatives that could help with business continuity, survival and prosperity.
The use of a demerger is one such initiative that might assist businesses to emerge post pandemic, supply chain issues, general costs increases and any other disruption, in good shape and ready to capitalise on new growth areas.
Many businesses operate different activities and lines within the same company or group. However, for numerous reasons, it can be advantageous to separate these different activities. Here are some examples:-
Ring-fencing loss-making business lines/assets
Increasing value of successful business lines
Allowing different activities to prosper without unnecessary regulatory constraint
Separating a jointly owned business
Separating valuable investments and property
There are a variety of interesting legal methods that can be adopted to achieve a UK demerger. Depending on the particular circumstances of the business and desired structure, the end result is usually the same in that it should be possible to separate business lines or assets between two or more companies, or mini groups, that are either owned by all the same shareholders or divided between the original shareholders. Methods such as direct dividend/transfer demergers; indirect/three cornered capital reduction or indirect dividend demergers; solvent liquidations under section 110 Insolvency Act 1986; or schemes of arrangement under Companies Act 2006, can all be used.
Outside of the UK, many jurisdictions including Brazil, Argentina, Mexico, Germany, France, Austria, Russia, Poland, Netherlands, Switzerland, Spain, Italy, Belgium, Egypt, China and Japan benefit from some form of local statutory demerger procedure. This means it is possible for certain assets and liabilities within a company to be transferred ‘automatically’ by operation of law, provided the necessary local procedures are followed. The transfer process can accordingly be simplified as matters like counterparty consents to the transfer of a contract from one entity to another, may not be required. Therefore, this separation method can be a useful tool for international businesses with foreign operations and foreign group entities too.
The success of a demerger often comes down to good planning, efficient project management and having the right legal and tax expertise on board from an early stage. If this can be achieved, then the benefits are often extremely attractive.
Businesses are having to think on their feet and be flexible, even more so now than ever before; demergers should be considered as a tool to assist with diversifying, getting ahead and potentially thriving.