Companies, Partnerships and Directors
Demergers and reconstructions
Demergers of businesses and group reconstructions have often had a stigma – the business world may regard them as the result of failure, but this is not necessarily the case. A strategic break-up of a group comprising different businesses may make good commercial sense, particularly in difficult economic times.
Why break up?
We are certainly seeing more clients wanting to explore the possibilities. It may be that a group has lost synergy between its constituent businesses, or maybe one in the group is underperforming and acting as a drag on the development of the others. Perhaps a split will enable the owners to unlock shareholder value and sell-off one or more business units that would be unattractive as a group. Maybe different members of a family want to take over responsibility for different areas of the business. These are all positive, constructive reasons for a break-up and we see the current trend towards consideration of these as likely to grow.
Section 110 Insolvency Act
There are various statutory methods for demerging a business and each has complex tax treatments. For that reason, it is vital that you consult your tax advisers at the earliest opportunity so that the most favourable tax treatment can be obtained. One of the most popular demerger options is the “section 110 Insolvency Act” scheme. Do not be put off by the “Insolvency” reference – a s. 110 scheme requires the company to be solvent! In broad terms, a section 110 scheme will involve the liquidation of the parent company and the distribution of the different business divisions to new companies. Each newco will “pay” for the transferred business by issuing shares to the parent and the liquidator will distribute those new shares to the original shareholders of the parent, in whatever new groupings or proportions are agreed. This may sound complex, but it simply means that the original shareholders end up owning (on their own) the different demerged business units. Their shares in the parent are effectively “swapped” (via the liquidation) for shares in the newcos.
So, if there might be commercial reasons to break up your business, and it is solvent, a s.110 scheme may be of benefit.